Third agency downgrades Spanish debt

Moody’s Investors Service has downgraded the Spanish government’s debt, joining two other major credit rating agencies which have taken similar steps out of concern over the country’s public finances.

The London-based agency lowered the rating by one notch, from Aa1 to Aaa, with a stabile outlook.

The agency said today that it was acting because of concerns over Spain’s weak economic growth prospects and what it called considerable deterioration in the government’s financial strength.

The other two agencies, Standard & Poor’s and Fitch, downgraded Spanish debt in late April and late May respectively.

pain has been a focus of market concern that its bloated deficit and weak economy might eventually require a bail-out of the kind which saved Greece from bankruptcy in May.

“One of the key drivers for Moody’s decision to downgrade Spain’s rating to Aa1 is its weak growth prospects and the challenge that this presents for fiscal consolidation,” said Kathrin Muehlbronner, a Moody’s vice president and lead analyst for Spain.

“Over the next few years, the Spanish economy is likely to grow only by about 1% annually on average. Growth rates in the rest of the EU are likely to be higher but also sluggish. Moody’s expects growth to average around 2% for the UK, 1.5%-2% for Germany and around 1.5% for France in the coming years,” she said in a statement.

As another reason for the downgrade, Moody’s cited “considerable deterioration of the Spanish government’s financial strength, as reflected in a more pronounced fiscal deterioration compared to Aaa-rated sovereigns”.

Moody’s also cited worsening debt affordability, or interest payments as a share of revenues, and significant borrowing requirements. It said this means the government remains vulnerable to market volatility.

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