Ratings agency Moody’s has downgraded Spanish debt by one notch to Aa2. The latest move is fuelled by concerns over the government’s ability to improve finances on the back of “moderate” economic growth.
Moody’s also warned that the cost of restructuring banks may “considerably exceed” than the present government’s projections.
Spain has been dubbed as one of the ‘peripheral’ economies of the eurozone and has recorded the highest rate of unemployment of 20% in the region.
Data released by Spain’s National Statistics Institute shows that although the economy expanded by 0.4% in the last quarter of 2010, overall it contracted by 0.1% for the full year.
Spain has one of the highest budget deficits in the eurozone and has been under pressure from EU members and investors to cut spending.
The government had approved a budget last September targeted to reduce deficits to 6% of GDP in 2011 from a high of 11.1% in 2009.
The government initiated reforms by cutting public sector spending by 7.7%, including a wage reduction of employees. It also raised personal income tax for those earning over €120,000 per annum.
Madrid said it will increase the compulsory retirement age to 67 years from 2013 from the current 65 years.
Moody’s had downgraded Greek sovereign debt to “highly speculative” earlier this week, attracting angry protests from Athens.
“Having completely missed the build-up of risk that led to the global financial crisis in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis”, an angry Greek finance ministry said.