Moody’s Investors Service said it is “skeptical” Spain’s two-month old government can meet its budget targets and it expects banks may need additional public support.
Moody’s cut Spain’s credit rating to A3 from A1, as it also downgraded five other European nations. Spain may fail to cut the budget deficit to 4.4 percent of gross domestic product this year from 8 percent last year, pushing the debt burden to 75 percent of GDP at year-end, the company said.
“Moody’s is skeptical that the target can be achieved and expects the general government budget deficit to remain between 5.5 percent and 6 percent,” it said in a statement yesterday from London.
Prime Minister Mariano Rajoy is trying to rein in the deficit that overshot its target last year as the economy headed back into its second recession in as many years. The government, in power since Dec. 21, is also pushing banks to recognize deeper real-estate losses and has offered to buy bonds that can convert into equity from struggling lenders.
Spain’s economy may shrink as much as 1.5 percent this year, hurting banks’ profitability just as the government is pushing them to increase provisions, Moody’s said. It is “doubtful” the government’s plan to encourage bank mergers will work without more public support, it said.
“Contingent risks arising from the banking sector are higher and more likely to crystallize in the case of Spain than among many of its peers,” it said.