Moody’s Downgrades Spain, But Misses A Point

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Moody’s downgraded Spain’s sovereign paper “by one notch to Aa2 from Aa1. The outlook on the Aa2 ratings is negative.” The cost of fuel and inflation of goods were not mentioned as primary problems. Neither was the nation’s 20% unemployment rate.

Moody’s decision centered around two critical problems. The first is the risk of the restructuring of Spain’s banks which the credit rating agency believes will be higher than the government expects. The second worry is that the financial trouble with Spain’s states will worsen and Spain will miss its short to medium term financial targets.

Moody’s also said that it may downgrade Spain again if  it cannot bring down its national debt at the anticipated pace.

Ratings agencies have been particularly active as they examine the finances of EU countries again. Among the reasons for the reexamination are  attempts by Ireland and Greece to renegotiate the terns of their EU and IMF loans. The theory is that nations that renegotiate cannot pay their obligations under current structures. That is not entirely true.

Nationalism is at the heart of some of the new risks. Ireland’s new government believes that its predecessors were taken advantage of. They want better terms because countries led by Germany forced high interest rates on them without fair cause. Citizens in Greece are unhappy with debt loads, but for different reasons. Austerity has begun to rob them of good life styles. They have elected to take to the streets and dodge payment of their taxes. These are more insidious than a government-based renegotiation of debt terms.  A nationwide tax strike is impossible to control.

Amongst all the strikes and posturing about interest rates is the rising price of oil and gas and inflation at the cost of goods sold level. Most European nations are very large net importers of oil and natural gas which puts them in a particularly troubled situation. More people will lose jobs as fuel prices rise, many businesses will lose money and between the two tax receipts will fall, if history is any guide.

There is an extent to which bank restructurings, like those Spain may be forced to make, are part of a controlled if painful process. Creditors loss money. The nations in which the banks are based give up some of their financial autonomy. But, the effects are often predictable. The same cannot be said about the impact of $120 oil.

Douglas A. McIntyre

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