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Asian markets drop on Spain ratings cut

By Kevin Voigt, CNN
updated 12:17 AM EDT, Thu June 14, 2012
  • Asian markets opened lower on the news of Spain's credit downgrade
  • Moody's has cut the rating of Spain government bonds to the edge of "junk" status

Hong Kong (CNN) -- Asian markets opened lower on the news that credit ratings agency Moody's has cut the rating of Spain to the edge of "junk" status.

All major Asian indices fell in early trade, with Hong Kong's Hang Seng index was down 0.8%, Japan's Nikkei fell 0.7% and Shanghai Composite was down 0.6%.

The Moody's downgrade was the latest sign that investor mood has not been buoyed by Madrid's Saturday request for up to €100 billion ($125 billion) from the European Union to recapitalize its ailing banks. Moody's cited the bailout request in its downgrade, saying "this will further increase the country's debt burden, which has risen dramatically since the onset of the financial crisis."

Moody's rating for Spain's government bonds dropped three notches to Baa3 from A3, one step above junk status, which is considered a "highly speculative" investment. Such a move would only add to Spain's woes, as the pool of eligible investors is reduced. Many institutional investors, such as government pension funds, are forbidden to invest in junk-rated bonds.

Spain struggling to stay afloat
Spain's borrowing cost reaches high
Spain faces more bank downgrades

Spain also has "very limited financial market access" to attract purchasers of new bond issues to pay for the nation's mounting debt woes, Moody's said. The yield on 10-year Spanish bonds rose to 6.83% this week, the highest level since the euro was introduced in 1999, raising the borrowing costs for the world's 12th largest economy to dangerous levels.

Spain's debt and banking troubles stem from speculative property investments that imploded with the 2008 credit crisis. Now Spain, going through its second recession since 2009, has an unemployment rate of 25%.

"If you were to see a collapse of the sovereign debt market in Spain and Italy, you are talking about a Europe-wide banking crisis," Robert Shapiro, chairman of Sonecon and an adviser to the International Monetary Fund, told CNN. "After all the largest banks in France and Germany alone hold $600 billion in Spanish sovereign debt. They hold even more Italian sovereign debt."

Italy sold 6.5 billion euros of one-year notes at an average yield of 3.97% this week, compared to 2.34% last month, CNNMoney reports.

The Spain downgrade was the latest blow in a series of crises that has kept the 17-nation European Monetary Union in an existential drama for the past two years. Greece, whose debt woes sparked the crisis in 2010, goes to the polls on Sunday in what could amount to referendum whether the nation will remain with the euro -- and accept tough austerity measures demanded by the European-led bailout -- or go it alone.

"Greece, I think, most economist think really can't be rescued, that what we're really seeing now is an attempt to set up an orderly mechanism for the exit of Greece from the eurozone," Shapiro said. "That will be a catastrophe for Greece, but if other arrangements are made it could preserve the eurozone."

CNNs Irene Chapple and CNNMoney's Ben Rooney and Catherine Tymkiw contributed to this report

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