LONDON — Casting a greater shadow over Spain’s economy, Moody’s Investors Service said Friday that it might cut the country’s credit rating in the coming months because of concerns about rising borrowing costs and the risk that private investors might have to bear some of the pain in any future bailouts.
Moody’s said it would consider cutting Spain’s long-term rating of Aa2 by only one level, which would still be a healthy investment grade.
The euro fell along with Spanish bond prices after the announcement, which comes as European leaders are trying to limit the prospect of the sovereign debt crisis, which has already ensnared Greece, Ireland and Portugal, from spreading to much bigger countries like Italy and Spain, both of which are struggling with weak economies.
Spanish and Italian bonds recovered slightly after a second European bailout for Greece was announced last week, but have dropped again this week as investors fret over whether the package will be sufficient and how long it will take to implement.
In its statement Friday, Moody’s wrote that the latest package could put additional burden on owners of Spanish debt because of the precedent set regarding the role of private bondholders.
As part of that bailout, banks and other private investors are to contribute about $72 billion by swapping their existing debt for new bonds with later maturities.
“Funding costs have been rising for some time for the Spanish government and for many closely related debt issuers, such as domestic banks and regional governments,” Moody’s said. “Pressures are likely to increase still further following the announcement of the official package for Greece, which has signaled a clear shift in risk for bondholders of countries with high debt burdens or large budget deficits.”
Moody’s on Wednesday cut the rating for Cyprus and Standard Poor’s reduce its rating for Greece, already in junk territory, by another two notches to CC, saying Greece might still default on its debt.
Moody’s said on Friday that it would weigh any risks to Spain’s debt rating against its relatively low public debt ratio compared to other European Union nations, such as Greece. It also praised the central government for meeting its 2010 target for reducing its budget deficit and the implementation of economic and social measures, including recapitlizating the banking sector.
But, it said, “challenges to long-term budget balance remain due to Spain’s subdued economic growth and fiscal slippage within parts of its regional and local government sector.”
It noted “positive signs” from the export sector but said domestic demand continued to be weak, in part due to the high unemployment rate.
The National Statistics Institute in Madrid reported Friday that the jobless rate fell in the second quarter to 20.9 percent, down from 21.3 percent in the previous quarter, but still the highest in the European Union.
Prime Minister José Luis Rodríguez Zapatero has cut wages and froze state pensions to reduce the government debt, but Spain’s financing costs surged again when European leaders failed to immediately agree on a bailout for Greece earlier this month.
Finance Minister Elena Salgado, speaking on Spanish radio Onda Cero, called on her E.U. partners to implement the decisions made last week in Brussels “more quickly” to reassure markets, Bloomberg News reported.
“Spain is on the right path for fiscal consolidation,” she said, while also noting that “Moody’s won’t take action” for another three months.
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