Protesters demonstrate in Madrid, on October 15, 2011, during a worldwide demonstration against corporate greed and government cutbacks.

Story highlights

Moody's has cut Spain's sovereign credit rating, casting doubt over the nation's deficit reduction

Last of the big three rating agency to take action on eurozone's fourth largest economy

Financial Times  — 

Moody’s has cut Spain’s sovereign credit rating, making it the last of the big three rating agency to take action in less than a month as confidence wanes over whether eurozone’s fourth largest economy will be able to meet its ambitious deficit reduction targets.

Citing Spain’s “moderate growth prospects” and vulnerability to further market turmoil freezing its access to international lending, Moody’s lowered its sovereign rating two notches from Aa2 to A1 and put it on negative outlook.

Ahead of a November general election predicted to see Spain’s embattled socialist government suffer a sweeping defeat, confidence among investors that it will succeed in meeting its budget deficit reduction plans has been damaged as the domestic economy shows little sign of recovery.

Fitch, another rating agency, had already cut Spain’s rating earlier this month from double A to double A minus, a decision followed by Standard and Poor’s last week. Up until September last year at least one of the three large agencies still rated Spain at the highest level of triple A.

“Spain’s large sovereign borrowing needs as well as the high external indebtedness of the Spanish banking and corporate sectors render it vulnerable to further funding stress,” Moody’s said.

The announcement comes after Moody’s had downgraded both Italy and Belgium.

Elena Salgado, finance minister, had said that she had aimed to reduce the deficit from 9.2 per cent of gross domestic product last year to 6 per cent this year, and 4.4 per cent in 2012, alongside economic growth of 1.3 per cent this year.

Spain’s borrowing costs have surged to euro-era highs this year as the European debt crisis has unfolded, but heightened concerns about Italy’s debt position has seen investors recently force it to pay more than Spain.

In its statement Moody’s said that it now expects Spain’s real growth of gross domestic product next year to come in at 1 per cent “at best”, compared to an earlier forecast of 1.8 per cent, while average growth in the following years would be about 1.5 per cent.

The lowering of Spain’s rating was also prompted by continued concerns about possible large deficits within Spain’s 17 regional autonomous governments, and their ability and willingness to control spending.

A planned privatisation programme that would have seen at least €15bn raised by selling stakes in the state lottery and airports authority was cancelled by the current government amid mounting protests from the opposition Popular party.

The PP, which polls suggest could achieve one of their best electoral results in recent history, has not yet formally outlined its economic programme, but joined the government this summer in pushing through a constitutional change to enforce budgetary stability.