The Spanish Government has criticised Moody’s after the agency downgraded its rating on the country’s debt just hours before a key announcement on the health of its banking sector.
The agency reduced the long-term debt rating from Aa1 to Aa2 with a negative outlook, meaning it could be downgraded further.
Moody’s expressed scepticism about Madrid’s assumption it can clean up savings banks’ balance sheets at a cost of less than €20 billion (£17 billion).
“The eventual cost of bank restructuring will exceed the Government’s current assumptions, leading to a further increase in the public debt ratio,” it said in a statement.
Elena Salgado, Spain’s Economy Minister, said: “Moody’s should have waited until this afternoon when the Bank would publish details of what the banks need to do.” The Bank of Spain is expected to name the banks and savings banks which have met new solvency tests.
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Earlier this week, Greece’s Finance Ministry also criticised Moody’s for a downgrade just days before a summit of eurozone leaders to thrash out a permanent rescue system for its weaker economies.
The 17 nations in the eurozone meet in Brussels on Friday for only the second time at heads of government level. They hope to eventually agree on a permanent bailout fund to replace the ad hoc measures that were hastily put in place to keep Greece and Ireland afloat last year.
“The rating downgrade announced by Moody’s is completely unjustified as it does not reflect an objective and balanced assessment of the conditions Greece is presently facing,” the Finance Ministry said in a statement.
“Moody’s downgrading of Greece’s debt reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy.”
The downgrade is a serious setback to efforts by the Spanish Government to quell fears by investors about its financial sector.
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Spain’s savings banks are still struggling under the weight of loans that turned sour after the end of the decade-long property bubble.
The agency said it also had concerns over Spain’s efforts to create sustainable government finances, given the limits of Madrid’s control over the regional governments’ spending.
Spain’s Socialist Government has brought in a series of reforms to ease market fears about its high annual deficits and the sluggish economy, encumbered by an unemployment rate of more than 20 per cent at the end of 2010 — the highest in the industrialised world.
Madrid has raised sales taxes, frozen old age pensions, cut public workers’ wages by five per cent, forced banks to strengthen their balance sheets, raised the retirement age and made it easier for firms to hire and fire.
Spain cut its public deficit to 9.24 per cent of total economic output in 2010 from 11.1 per cent in 2009, narrowly beating its target of 9.3 per cent.
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Madrid has vowed to drive its public deficit below the European Union limit of 3 per cent of gross domestic product by 2013.
The credit rating downgrade means investors will tend to demand higher interest rates before taking the risk of lending to Spain.