WSJ: Moody's Downgrades Spain

EUROPE BUSINESS NEWS | MARCH 10, 2011, 3:57 A.M. ET
Moody's Downgrades Spain

By EVA SZALAY And TERENCE ROTH

LONDON—Moody's Investor Service Inc. on Thursday downgraded Spanish government debt to Aa2 with a negative outlook from Aa1 previously, triggering sharp declines for the euro and European bond prices in early European trading.

Moody's warned that further downgrades were still possible as the costs of bank restructuring and slow economic growth could limit the Spanish government's ability to improve the country's financial situation.

The news fanned concerns in European financial markets that high-debt countries in the euro-zone could bring the 17-nation currency closer to a new debt crisis. Earlier this week Standard & Poor's downgraded Greek government debt.

Moody's said the downgrade reflected the high costs associated with restructuring the country's banking system, which will lead to an increased public-debt ratio, and added that risks to government finances remain skewed to the downside.

"The eventual cost of bank restructuring will exceed the government's current assumptions, leading to a further increase in the public debt ratio," the ratings agency said.

Moody's also cited continued concerns over the ability of the Spanish central government to generate sustainable and structural improvement in general government finances because of its limited control over regional governments' spending and expectations of slow economic growth. It warned that further downgrades could come if the public-debt ratio increases more rapidly than expected and if the country misses fiscal targets in 2011.

Moody's asserted, however, that the country's debt sustainability isn't under threat and commended the government's efforts for addressing fiscal issues.

The euro lost 0.5% of its value against both the Swiss franc and the dollar to hit the day's low at 1.2882 Swiss francs and $1.3804, respectively. The common currency also chalked up hefty losses against the Japanese yen, shedding 0.4% to trade at the day's low of 114.47 yen immediately after the announcement.

Spanish government bond prices fell along with bonds issued by other governments with weak public finances, including Portugal and Ireland. Prices for German and U.K. government bonds, deemed as "safe-havens," rose as investors turned away from higher-yielding but riskier debt issued by states along the euro zone's periphery.

European debt-insurance costs for countries and companies were higher in early trade Thursday.

"No big surprise here that Spain has been downgraded, and there will likely be more downgrades to come," said analysts at ING.

Write to Terence Roth at terence.roth@dowjones.com

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Moody's Downgrades Spain