Moody’s strikes Spain, cuts credit rating

Barely three days after downgrading debt-laden Greece, global rating agency Moody's Investors Service yesterday cut its rating on Spain, euro zone's fourth-largest economy, rekindling concerns of a continuing European credit crisis. 

On Monday, Moody's slashed its credit rating on Greece, the troubled euro zone nation bailed out last year by the EU and IMF, by three notches to B1 from Ba1 causing rage and sharp criticism from the Greek government. (See: Moody's downgrading of Greece draws flak from Athens)

Moody's rating cut on Spanish government bonds by a notch to Aa2 from Aa1 with a negative outlook, has been triggered by concerns about the country's weak banking sector and sluggish economic growth. The action is the result of the review for a possible downgrade initiated by the agency earlier in December. (See: Spain goes in for bond sale as credit risk downgrade looms)

The rating agency believes the eventual cost of bank restructuring would exceed government projections, leading to a further increase in the public debt ratio.

Further, by achieving a moderate economic growth in the short to medium term, the government would have only limited ability to achieve the required improvement in general government finances, it said.

Moody's also downgraded Spain's bank rescue fund, Fondo de Reestructuración Ordenada Bancaria (FROB) to Aa2 from Aa1 with negative outlook as the fund's debt carries unconditional government guarantee.