Moody's Downgrades Spain Two Notches, Outlook Negative (zt)

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Moody's Investors Service downgraded Spain's government-bond rating two notches because of market stress, deteriorating growth prospects and fading likelihood of reaching growth targets, and it kept the door open to another downgrade.

Although it maintained the rating's negative outlook, it eased the threat of another cut by removing the ratings from review for a possible downgrade. Tuesday's cut to A1, which is four steps below the highest possible grade for credit quality, concluded a review that began in July, Moody's said.

It and other ratings firms have been lowering their ratings and outlooks on several European countries recently because of a continuing credit crisis there. Moody's has also taken negative actions on Italy and Belgium recently, based on the credit concerns.

Moody's said the country continues to be vulnerable to market stress and event risk without a credible resolution of the sovereign-debt crisis. The firm said Spain's already moderate growth prospects have declined further because of the overall worsening outlook for global and European growth and the difficult funding situation for the banking sector and its impact on the wider economy.

It said it now expects Spain's real gross domestic product growth in 2012 to be 1% at best, compared with earlier expectations of 1.8%.

Moody's said that the lower economic growth would make it harder for Spain to achieve its ambitious fiscal targets. It expects budget deficits for the general government sector to be above target both this year and next, and it continues to have doubts about regional government funding.

The firm said it was maintaining a negative outlook on Spain because of the risk the European crisis could escalate.