Credit Rating Cut Spain One Level to Aa2 by Moody’s 2011 - Barcelona Reporter

The credit rating was cut to Aa2 by Moody’s Investors Service, which said the cost of shoring up the banking industry will eclipse government estimates. The euro fell and Spanish bond yields rose.

Spain will spend as much as 50 billion euros ($69 billion) shoring up savings banks, Moody’s forecast, more than double the 20 billion-euro price set by the government. The risks to government finances remain “skewed to the downside,” the company said in a statement today. The outlook is “negative,” suggesting more rating cuts are under consideration.

As Spain tries to convince investors that struggling savings banks won’t overburden its public finances, European leaders have set a March 25 deadline to approve a package of measures to end the sovereign debt crisis. The Bank of Spain is due to announce today the capital shortfalls of lenders.

“The crisis in the euro region is going to take a long time to resolve, and the rating downgrade of Spain is a reflection of that,” said John Stopford, head of fixed income at Investec Asset Management in London, which manages about $80 billion. “Any expectation that meetings in March are going to lead to a quick solution is a bit naïve.”

The gap between Spanish and German borrowing costs widened 9 basis points today to 231 basis points, the highest in five weeks as the yield on 10-year notes rose 3 basis points to 5.50 percent. The euro slid 0.6 percent to $1.3825 as of 7:18 a.m. in London.

Moody’s had put Spain’s rating on review on Dec. 15, after lowering its credit grade to Aa1 from Aaa in September. Fitch Ratings, which calls Spain AA+, changed the outlook to “negative” on March 4. Standard & Poor’s rates the nation AA, after stripping it of its top AAA grade in January 2009.

Capital Requirements

As part of its effort to regain investors’ confidence, the government tightened capital requirements for lenders on Feb. 18, setting core capital ratios of 8 percent for listed banks and 10 percent for lenders that don’t have shareholders and depend on wholesale funding.

Spain’s economy emerged from an almost two-year recession last year, before contracting again in the third quarter as the deepest austerity measures in at least three decades undermined the recovery. The government forecasts economic growth of 1.3 percent in 2011, even as the unemployment rate remains above 20 percent.

Spain is trying to cut the budget deficit to 6 percent of gross domestic product this year -- in line with France’s targeted shortfall -- from 9.2 percent last year when it was the third-largest in the euro region. While the central government beat its budget goal last year, regional administrations, which control health and education and employ half of public workers, overstepped their combined target, government data show.

The Bank of Spain will release its own report on banks' capital needs after markets close on Thursday.

The European Central Bank backed Spain's planned measures to shore up the sector, while Prime Minister Jose Luis Rodriguez Zapatero defended Spain's economic fundamentals as reasonable.

The government and central bank have forecast no more than 20 billion euros would be needed to recapitalise weak banks.

But Moody's said the overall cost was likely to be nearer 40-50 billion euros. In a more stressed scenario recapitalisation needs could even rise to around 110-120 billion euros, it said.

Ratings agency Fitch later estimated at 38 billion euros the shortfall in Spain's banking system in a base-case stress test it conducted separately.

Moody's still rates Spain as a high grade investment proposition. By way of comparison, the agency rates Portugal two notches lower and Greece far down with junk status