Moody’s Lowers Spain’s Credit Rating
by Hiland Doolittle
Spain beat the clock Thursday morning by successfully selling 3.5 billion euros in 5-year bonds just ahead of Moody’s downgrade of the credit rating in five of the country’s regions. Surprisingly, the average yield at tender rose just 12 basis points from Spain’s successful May auction.
On Wednesday, Moody’s announced an upcoming review of Spain’s credit rating. The success of the bond auction indicates that investors had already factored in the ratings slide. Standard & Poor’s and Fitch had already downgraded Spain’s rating earlier this quarter, but on Wednesday Moody’s said the rating could fall by as much as two levels.
Spain’s Prime Minister has tried to keep the country one step ahead of analysts, many of whom feel the country is headed for a “Greece-type decline.” Prime Minister Jose Luis Rodriquez Zapatero’s Socialist Party managed to pass austerity legislation in May by the slightest of margins – one vote. Ever since, support for the Socialist Party has declined. Much of the dissatisfaction has been focused on proposed reforms to the country’s labor laws.
Spain currently faces a 20 percent unemployment rate. Adding to the fiscal woes is the fact that the country’s recession recovery has amounted to barely a whisper. Political opposition to the austerity cuts mounted in June. The opposition maintains that policy changes regarding unemployment only scratch the surface of a deep hole.
The country must find the means to deal with the reality of minimal growth to offset a decade of inflationary practices and some of the highest levels of household and corporate debt in the euro zone.
Greece Pains The PIIGS
Comparisons to Greece also continue to haunt Portugal, Italy, Ireland and, of course, Spain. Kathrin Muehlbronner of Moody’s describes what is happening in Southern Europe. “The contagion has been so dramatic in the markets in the last few months people forget really what a gulf there is between Spain and Greece… Spain is a very highly credit worthy country,” said the analyst.
In 2009, Spain had a public deficit of 11.2 percent. Spain’s debt-to-GDP ratio is closing in on 55 percent. Moody’s says the ratio will rise to 80 percent by 2014.
Zapatero’s government announced a plan to trim 15 billion euros from the budget by 2013. The government projects these savings will cut the budget deficit to 3 percent of GDP by 2013.
Moody’s strongly disagrees, citing the government’s growth projections as unrealistic. The rating agency projects 1 percent growth from 2010 to 2014. Government projects 3 percent growth by 2013. In Wednesday’s report, Moody’s stressed the need for deeper cuts and a revamping of the country’s employment policies.
Labor reform legislation is currently under review by parliament. Spain has the highest unemployment rate in the euro zone. Critics say the reform package does not acknowledge the severity of the employment crises. 40 percent of employable Spaniards under the age of 25 are unemployed.
The country is busily finalizing plans to bring the unlisted private banks under one umbrella. The merger of some of the country’s troubled banks has already cost the government 10 billion euros. Plans to bring the smaller, private banks under tighter reins through mergers are projected to cost another 30 billion euros.
Adding to the financial pressure is a July redemption ticket for 16.2 billion euros.
Tags: Consumer Confidence, depression, ECB, Economy, Euro, Euro Zone, European Central Bank, GDP, PIIGS, Spain, US Dollar
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
