Moody’s downgrades Spain’s credit rating

MADRID—Moody’s downgraded Spain’s credit rating yesterday, citing worries over the cost of the banking sector’s restructuring, the government’s ability to achieve its borrowing reduction targets and grim economic growth prospects. The agency reduced Spain’s rating by one notch to Aa2 and warned that a further downgrade is possible if indications emerge that Spain’s fiscal targets will be missed, and if the public debt ratio increases more rapidly than currently expected.

On the plus side, Moody’s Investors Services noted the government’s resolve in dealing with its problems and added that Spain’s debt sustainability is not under threat. Spanish Finance Minister Elena Salgado said the government agrees that the nation must make a better effort to push debt-laden regional governments to reduce their deficits. However, Moody’s also warned that concerns could rise if funding requirements for Spain’s troubled savings banks—called cajas —end up greater than anticipated. They have been hit particularly hard by a burst real estate bubble.

In a statement sent hours after the downgrade, the Bank of Spain said the banking sector needs €15.5 billion ($21.4 billion) in new cash. That is well below the government’s earlier top estimate of €20 billion ($27.6 billion), published last month when it announced new capital requirements for commercial banks and the savings banks. The Bank of Spain said a total 12 banks need to raise capital to comply with the February decree, which was approved yesterday in Parliament. Two are Spanish banks, two are subsidiaries of foreign banks and eight are savings banks, or cajas—the main source of concern.

Topping the list of the needy 12 are Unnim, a fusion of Spanish cajas that the central banks says needs €568 million in additional capital, followed by the local unit of Barclays at €552 million. The central bank said the €15.5 billion figure is subject to change, depending on how banks go about raising capital as required by the government. Spain’s main stock index sank after the Moody’s report to close down 1.2 per cent, and the yield on Spain’s ten-year bonds rose 0.01 percentage point to 5.50 per cent.