Already crippled by serial downgrades of its sovereign paper, an unemployment rate of 25%, a national economy that has slipped into its second recession in five years, and a sullen and mutinous population, Spain received even more bad news — this time from Moody’s.
Spain’s borrowing costs have already spiked higher in recent weeks, and there is broad belief that it cannot sustain borrowing costs in excess of 6% on 10-year notes. A planned $125 billion bailout for Spain will go predominantly to help the nation’s banks, which will leave the country close to the need for a second bailout to cover deficit forecast shortfalls and rising debt.
Moody’s Investors Service has today downgraded Spain’s government bond rating to Baa3 from A3, and has also placed it on review for possible further downgrade. Moody’s expects to conclude the review within a maximum timeframe of three months.
The decision to downgrade the Kingdom of Spain’s rating reflects the following key factors:
1. The Spanish government intends to borrow up to EUR100 billion from the European Financial Stability Facility (EFSF) or from its successor, the European Stability Mechanism (ESM), to recapitalise its banking system. This will further increase the country’s debt burden, which has risen dramatically since the onset of the financial crisis.
2. The Spanish government has very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalisation funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from the ECB.
3. The Spanish economy’s continued weakness makes the government’s weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years.
Douglas A. McIntyre