Spain Cut Three Steps to Baa3 by Moody’s on Debt Level

Spain’s credit rating was downgraded three steps by Moody’s Investors Service, citing the nation’s increased debt burden, weakening economy and limited access to capital markets.

The country was cut to Baa3 from A3 and is on review for further downgrade as it plans to borrow 100 billion euros ($126 billion) from European Union rescue funds to recapitalize its banking system, adding to the government’s debt load, New York- based Moody’s said today in a statement. Spanish Prime Minister Mariano Rajoy requested the rescue on June 9.

The key reason for the downgrade “is obviously the need of Spain’s government to ask for external help,” Kathrin Muehlbronner, a London-based senior analyst with the sovereign group at Moody’s, said in a telephone interview. “In our view, that’s not a sign of strength, it’s a sign of weakness.”

Spain’s ratio of debt to gross domestic product is expected to rise to more than 90 percent by the end of the year, from less than 40 percent in 2007, she said. The country’s ranking is one level above junk, or speculative-grade. Moody’s said it will likely finish its rating review within a maximum of three months.

“One of the key reasons the rating is so close to the non- investment-grade category is we do see an increasing risk that the Spanish government will have to seek further aid,” Muehlbronner said.

Yields on Spanish debt due in 10-years climbed to 6.75 percent today, compared with 5.1 percent at the end of last year.

“The Spanish government has very limited financial market access,” Moody’s said in the statement, citing the nation’s need for rescue funds and “its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from the” European Central Bank.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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