Moody's cuts Spain by 2 notches, sees funding risks

Tue Oct 18, 2011 9:15pm EDT
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By Walter Brandimarte

NEW YORK (Reuters) - Moody's Investors Service on Tuesday cut Spain's sovereign ratings by two notches, saying high levels of debt in the banking and corporate sectors leave the country vulnerable to funding stress.

Worsening growth prospects for the euro zone will also make it more challenging for Spain to reach its ambitious fiscal targets, the ratings agency added.

In particular, Moody's said it continues to have serious concerns regarding the funding situation of the regional governments.

Spain has said it will deflate its public deficit to 6 percent of GDP this year from 9.3 percent of GDP in 2010, though many economists are concerned this could be derailed by a lack of fiscal discipline at regional level.

The government's regional deficit target is 1.3 percent of GDP for this year.

"Not all the regions are the same. But we do think the regions will deviate from the aggregate (deficit) target for this year," Kathrin Muehlbronner, senior analyst, Sovereign Group Moody's told Reuters in a telephone interview on Wednesday.

Spain could be downgraded again if the euro zone debt crisis escalates further, Moody's warned.

Since placing Spain's ratings under review in late July, no credible resolution of the current sovereign debt crisis has emerged, and it will in any event take time for confidence in the area's political cohesion and growth prospects to be fully restored, Moody's said in a report.   Continued...

<p>A Spanish flag flutters over the Colon square in central Madrid May 28, 2010. REUTERS/Andrea Comas</p>