Moody's Says Spain May Lose Aaa Rating; U.S. Needs `Clear Plan'

Spain will probably lose its Aaa credit rating after the country was put under review for possible downgrade in June, and the U.S. needs a “clear plan” to tackle its deficit, Moody’s Investors Service said.

“Spain is very highly rated and I can’t say where that rating will end up, but it’s likely to go down a bit,” Steven A. Hess, senior credit officer at Moody’s, said in an interview in Sydney yesterday. In the U.S., slower growth may hinder government efforts to address the budget shortfall, he said.

The Spanish government is trying to cut the third-largest budget deficit in the euro region while returning to growth after an almost two-year recession. Spain’s classification may be lowered as much as two grades, Moody’s analysts said June 30, citing “deteriorating” economic prospects and the challenges the government faces to achieve its fiscal targets.

“We’re watching the government’s measures that they are implementing and we’ll probably try to put that rating at the level we think it should belong for some time to come,” Hess said. “We don’t see it moving down as many notches as Greece did.”

Moody’s last month downgraded Greece four steps to non- investment grade, citing “substantial” risks to economic growth from the austerity measures tied to a 110 billion-euro ($144 billion) aid package from the European Union and the International Monetary Fund. The company’s review of Spain will be concluded within a three-month period, it said in June.

Photographer: Christian Keenan/Bloomberg

Moody's Investment Services senior credit officer Steven A. Hess. Close

Moody's Investment Services senior credit officer Steven A. Hess.

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Photographer: Christian Keenan/Bloomberg

Moody's Investment Services senior credit officer Steven A. Hess.

Rating Cut

Standard & Poor’s cut Spain’s rating in April and Fitch followed with a downgrade in May.

Spain’s unemployment rate, the highest in the euro region, rose to 20.1 percent in the second quarter, the highest in more than a decade, the National Statistics Institute said today. The rate has more than doubled in three years, as a result of the collapse of a decade-long building boom.

The extra yield investors demand to hold Spanish debt rather than German equivalents rose to 159 basis points today from 152 basis points yesterday. That compares with a euro-era closing high of 221 basis points on June 16.

The U.S. faces a difficult task in trying to stimulate growth as its current debt trajectory would threaten the nation’s top rating in the years ahead, said Hess.

“The U.S. certainly shouldn’t be trying to put more debt on its books, but we do have questions about the strength of the economic growth,” Hess said. “If economic growth is not there, then the government’s ability to fix its budget problem is less because the revenue will be less. So it can be counter- productive not to stimulate.”

Gross domestic product in the world’s largest economy probably slowed for a second quarter, the Commerce Department is forecast to say today. The U.S. economy grew at an annual 2.6 percent pace last quarter from 2.7 percent in the previous three months, according to the median estimate of economists surveyed.

Former Federal Reserve vice chairman Alan Blinder joined Nobel prize-winning economist Joseph Stiglitz and Mark Zandi, chief economist at Moody’s Economy.com, in signing an open letter calling on the government to increase spending to bolster the economy, published July 19 by the Daily Beast website.

Hess said the U.S. needs a strategy for curbing its budget deficit, which was 9.9 percent of GDP at the end of last fiscal year on Sept. 30. The fiscal shortfall is projected to reach a record $1.47 trillion this year.

Clear Plan

“Having a clear plan certainly increases confidence and the U.S. doesn’t have that yet,” said Hess.

President Barack Obama on Feb. 18 formed a bipartisan commission to recommend steps to reduce federal debt, projected to reach 90 percent of the economy by 2020. Its recommendations are due Dec. 1, after midterm elections in November.

The panel’s challenge is to devise a plan proposing tax increases and spending cuts that can get backing from at least 14 of its 18 members, the number needed to forward any proposal to Capitol Hill, and then win support in Congress.

“The question is, will the politics allow these recommendations to be adopted and implemented?” said Hess. “This is what we’re going to be watching over the next couple of years, because the debt trajectory as it is now is something that might potentially cause us to consider whether the U.S. is Aaa at some point in the future.”

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net Lisa Pham in Sydney at lpham14@bloomberg.net.

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