Spain’s Rating Raised to Baa2 by Moody’s Amid Structural Changes

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Residential buildings and skyscrapers stand beyond a statue on the city skyline in Barcelona on Feb. 21, 2014. Close

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Photographer: David Ramos/Bloomberg

Residential buildings and skyscrapers stand beyond a statue on the city skyline in Barcelona on Feb. 21, 2014.

Spain’s credit rating was raised to Baa2 at Moody’s Investors Service, which cited a rebalancing of the economy toward more sustainable growth and progress made in implementing structural reforms.

The outlook for the rating is positive, Moody’s wrote in a statement yesterday. The one-level increase was from Baa3, which is one step above junk.

“This recovery has legs,” Kathrin Muehlbronner, a Moody’s analyst based in London, said in a phone interview yesterday. “It actually is sustainable because there have been quite a lot of structural reforms,” covering the labor market, pensions, public finances, taxation and banking, she said.

Borrowing costs in peripheral European nations have fallen after Ireland and Spain exited their rescue programs. Spain sold 10-year bonds Feb. 20 at the lowest yield since 2006, when the country was growing at an annual rate of 4 percent and the public debt burden, at 40 percent, was less than half the current level. The 10-year yield fell as low as 3.52 percent this week.

Spain’s economy emerged from a two-year recession in the third quarter and the government forecasts growth of 0.7 percent this year. Foreign investors are snapping up bonds and shares, spurring a 20 percent increase in the nation’s main share index in the past six months. Still, unemployment remains the second-highest in the European Union at 26 percent.

Narrowing Deficit

The improving economy makes it more likely Spain will narrow its budget deficit in the next few years, Moody’s said. This year’s target of a budget deficit equal to 5.8 percent of gross domestic product is achievable, it said. Last year’s deficit was 7 percent of GDP, the credit-rating company said.

Spain’s debt, 94 percent of GDP last year, will probably only peak in 2016, above 102 percent, Moody’s said. “Low fiscal strength,” plus deteriorating asset quality in the banking system and high private-sector debt still restrain the country’s creditworthiness, Moody’s added.

The upgrade is the first time Moody’s has raised Spain’s rating since 2001, when it received a Aaa score. Spain has the second-lowest investment-grade rating at Fitch Ratings and the lowest investment grade at Standard & Poor’s.

Investors routinely ignore ratings companies’ decisions. In almost half the instances, yields on government bonds fall when a rating action by Moody’s and rival Standard & Poor’s suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. When S&P downgraded the U.S. government in August 2011, bonds rose and pushed Treasury yields down to records.

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net

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