Spain's credit rating set for Moody's cut

Spain’s top Aaa credit rating, held since 2001, probably will be cut one level by Moody’s Investors Service as the euro region’s fourth-biggest economy struggles to grow, according to investors managing about $700 billion.

Five out of eight money managers surveyed predicted a one- step reduction to Aa1, with the rest forecasting a two-level cut to Aa2. The decision may come this week after Moody’s put Spain’s debt on review for a possible downgrade on June 30, saying it would conclude the analysis within three months.

Moody’s said then it will take several years for Spain’s economy to recover from the collapse of its real estate boom, predicting gross domestic product will expand an average of “slightly above” 1 per cent between 2010 and 2014. A one-step cut would put Moody’s ranking on par with Fitch Ratings, which has a AA+ classification for the Iberian nation, while a two- level reduction would equal Standard & Poor’s.

“The market is pretty shaky so if they get downgraded by two, then that could have an impact,” said Andrew Balls, London-based head of European portfolio management at Pacific Investment Management Co, which runs the world’s biggest bond fund. “We keep an eye on what rating agencies do, sometimes as a lagging indicator, as something that can be important in terms of market sentiment.”

Spanish borrowing costs have declined since the Moody’s announcement, with the yield on the 10-year bond falling to 4.23 per cent today from 4.56 per cent at the end of June, as stress tests in July showed the nation’s banks needed less than ¤1.8 billion ($2.5 billion) in new capital. Yields also dropped as the government of Prime Minister Jose Luis Rodriguez Zapatero implemented austerity measures to trim the budget deficit.

Spain’s central government budget deficit narrowed by 42 per cent in the first eight months of the year as tax revenue surged and spending cuts took effect. The shortfall fell to 3.3 per cent of gross domestic product from 5.7 per cent a year earlier, the Finance Ministry said two days ago.

Bonds of so-called peripheral euro-region nations plunged this year as a debt crisis that started in Greece spread to other nations, prompting the EU and IMF to put in place a $1 trillion financial backstop for its members.