Spain’s credit rating was cut by two notches by Moody’s, which gave the country the fifth highest investment grade compared to other ratings agencies, Fitch and Standard& Poor’s which gave Spain the fourth highest ranking just recently.
Spain’s credit rating now stands at A1 after being lowered from Aa2. This is still above the other peripheral indebted euro-zone countries like Greece, Italy, Portugal and Ireland.
In an official statement, Moody’s cited weaker growth prospects. Without growth Spain cannot cut its burgeoning deficit.
Moody’s also cited the “continued vulnerability of Spain to market stress” that is driving up the cost of borrowing. Yesterday yields on the 10-year Spanish bond rose for the seventh consecutive day to 5.35 percent.
“Moody’s is maintaining a negative outlook on Spain’s rating to reflect the downside risks from a potential further escalation of the euro area crisis.”
As the news trickled out as the Asian trading session got underway, the euro tumbled against most major counterparts but soon recovered later in the session as Asian equity markets moved higher.
Spain’s rating would face more downward pressure if the government formed after November elections doesn’t commit to further measures to reduce budget deficits, Moody’s said.
“On the other hand, the implementation of a decisive and credible medium-term fiscal and structural reform plan coupled with a convincing solution to the euro-area crisis would trigger a return to a stable outlook,” it said.
Concerns are still high and many still doubt that the euro zone can contain the debt crisis that risks spreading to the region’s banks as they lack the capital to absorb a shock in sovereign debt.
The focus turns to the European Union Summit this upcoming weekend on October 23 with hopes that there will be some concrete developments to come closer to solving the euro-zone sovereign debt crisis.