Spanish borrowing costs soar after double downgrade
by Daniel Mason
Two credit rating agencies downgraded Spain last night less than a week after the country said it would seek a bail-out of up to €100bn to recapitalise its crisis-hit banking sector.
Moody's cut its rating on Spain to Baa3 from A3, leaving it just one notch above so-called junk status, and left the door open for a further downgrade following a review. It meant Moody's joined the other major rating agencies, Standard & Poor's and Fitch, in stripping Spain of its A grade status.
Separately, Egan-Jones lowered the country's score to CCC+ from B. It was the agency's fourth downgrade of Spain in six weeks and put it deep into junk territory. Like Moody's it applied a negative outlook.
The decision last weekend by eurozone countries to offer Spain up to €100bn in bail-out loans to shore up its banks has failed to calm market fears. The Bank of Spain has revealed that the country's banks borrowed a record €324.6bn from the European Central Bank last month, up from €319.9bn in April.
This morning the scale of the crisis in Spain was amplified as government borrowing costs hit a new high, with the yield on 10-year bonds climbing to 7 per cent, a level widely considered to be unsustainable. Borrowing costs were also up today in Italy as the government sold €4.5bn of bonds.
Moody's said the Spanish bail-out would "materially worsen" government finances by pushing public debt to about 90 per cent of gross domestic product this year. "Stabilising the ration will be a key challenge for the Spanish authorities, requiring years of continued fiscal consolidation," the rating agency said.
It added that Spain's "unsustainable" reliance on eurozone loans to recapitalise its banks meant the likelihood of the country losing market access, and the government being forced to seek direct support from the European Union bail-out funds in the style of Greece, Ireland and Portugal, would "continue to rise".
However, the rating agency acknowledged that, although Spain remains mired in recession, the government has a "clear desire to reverse the debt trajectory through a strong fiscal consolidation programme".
According to a report by Datamonitor, Spain also fell victim last year to a "sea change in the world's top 10 wealth markets" as measured by dollar millionaire holdings. It remarked that 2011 "saw the entry of India and the exit of Spain, and this seems to be just the first example of emerging markets in and their western counterparts out".
"The continuing eurozone crisis, a slowing Chinese economy and escalating political instability in the Middle East are all contributing factors to the unpredictability that is expected to continue in global markets over the next couple of years," said Datamonitor's senior analyst Matia Grossi.
Meanwhile, last night Moody's downgraded Cyprus further into junk territory, slashing its rating to Ba3 from Ba1. It blamed the "material increase in the likelihood of a Greek exit from the euro area, and the resulting increase in the likely amount of support that the government may have to extend to Cypriot banks".
It said the situation was "exacerbated by the fact that the country's finances are already strained and access to the international markets is still denied". Earlier this week Cyprus suggested it might seek an EU bail-out to help recapitalise Cyprus Popular Bank, its second largest lender, which is heavily exposed to Greek debt. However, it might turn to Russia for help instead, having already secured a €2.5bn rescue loan from there last year.