Moody's Cuts Spain's Rating to Aa2 with a Negative Outlook

Spain’s credit rating was cut to Aa2 by Moody’s Investors Service, which said the cost of shoring up the banking industry will eclipse government estimates. The euro fell and Spanish bond yields rose

Spain, which used to hold top-notch triple A ratings from all the main rating agencies, saw its ratings cut one grade to Aa2 by Moody’s Investor Service. The agency warned that the eventual cost of restructuring the banks will exceed the government’s current assumptions of €20bn. Moody’s said the costs could rise to as high as €50bn.

Moody’s said: “There is a meaningful risk that the eventual cost of the recapitalisation effort could considerably exceed the government’s current projections.

Spain will spend as much as 50 billion euros ($69 billion) shoring up savings banks, Moody’s forecast, more than double the 20 billion-euro price set by the government. The risks to government finances remain “skewed to the downside,” the company said in a statement today. The outlook is “negative,” suggesting more rating cuts are under consideration. As Spain tries to convince investors that struggling savings banks won’t overburden its public finances, European leaders have set a March 25 deadline to approve a package of measures to end the sovereign debt crisis. The Bank of Spain is due to announce today the capital shortfalls of lenders.

“The crisis in the euro region is going to take a long time to resolve, and the rating downgrade of Spain is a reflection of that,” said John Stopford, head of fixed income at Investec Asset Management in London, which manages about $80 billion. “Any expectation that meetings in March are going to lead to a quick solution is a bit naïve.”

The gap between Spanish and German borrowing costs widened 9 basis points today to 231 basis points, the highest in five weeks as the yield on 10-year notes rose 3 basis points to 5.50 percent. The euro slid 0.6 percent to $1.3825 as of 7:18 a.m. in London. Moody’s had put Spain’s rating on review on Dec. 15, after lowering its credit grade to Aa1 from Aaa in September. Fitch Ratings, which calls Spain AA+, changed the outlook to “negative” on March 4. Standard & Poor’s rates the nation AA, after stripping it of its top AAA grade in January 2009.

Moody's Downgrades Ratings of four regions in Spain

Moody’s Investors Services on Friday downgraded the credit ratings of the Spanish regions Castilla-La Mancha, Catalonia, Valencia and Murcia after they failed to meet the target set by the central government for reducing their budget deficits last year. The move comes a day after the agency downgraded Spain’s sovereign ratings by a notch, citing the costs of the recapitalization of the banking sector and the problems the country’s regions face in reducing the shortfall in their finances.

Castilla-La Mancha’s longterm issuer and debt ratings were cut to A2 from A1, Catalonia’s to A3 from A2, Murcia’s to A1 from Aa3 and Valencia’s to A2 from A1. The agency said the downgrades reflect the “wide deviations registered by these regions from the deficit limits set for 2010 and the subsequent difficulties Moody’s anticipates they will encounter in controlling their deficit and debt projections in 2011-12.” It said the budget forecasts of the four regions over the past few years had also been “unreliable.”