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Spain’s Rating Cut to A1 by Moody’s With Negative Outlook

Spain’s credit rating was cut for the third time since June 2010 by Moody’s Investors Service as Europe’s sovereign-debt crisis threatens to engulf the nation.

Moody’s reduced its ranking to its fifth-highest investment grade, cutting it by two levels to A1 from Aa2, with the outlook remaining negative, the rating company said in a statement today. Standard & Poor’s downgraded Spain on Oct. 14 to its fourth-highest investment grade after Fitch Ratings cut it to the same level on Oct. 7, the day it also downgraded Italy.

Spain continues to be vulnerable to market stress and event risk while already moderate growth prospects for the nation have been scaled back further, Moody’s said in the statement.

Spanish, Italian and Greek bonds fell today on concern that the euro region is struggling to contain a crisis that threatens to trigger another global slump, as banks faced with rising defaults lack the capital to absorb a shock in sovereign debt. German Chancellor Angela Merkel said yesterday that a European Union summit in five days will mark an “important step,” though not the final one in solving the euro-area sovereign debt crisis.

The downgrade of the euro region’s fourth-largest economy’s rating is “very bad news for Europe”, Patrick Legland, the Paris-based head of research at Societe Generale SA, told Bloomberg Television before the ratings cut. “Greece, we have issues with but it will be controlled, the next step might be far more serious, with Spain or Italy,” he said.

Spain had the best investment grade possible with all three rating companies in January 2009, when Standard & Poor’s was the first to cut. The country is paying more than twice what Germany does to borrow for a decade even after the European Central Bank stepped in to prop up its bond market on Aug. 8.

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