Leading ratings agency downgrades spanish debts

Moody's Investor Service Inc. on Thursday downgraded Spanish government debt to Aa2 with a negative outlook from Aa1 previously, triggering sharp declines for the euro and European bond prices in early European trading. Moody's warned that further downgrades were still possible as the costs of bank restructuring and slow economic growth could limit the Spanish government's ability to improve the country's financial situation.

The news fanned concerns in European financial markets that high-debt countries in the euro-zone could bring the 17-nation currency closer to a new debt crisis. Earlier this week Standard & Poor's downgraded Greek government debt.

Moody's said the downgrade reflected the high costs associated with restructuring the country's banking system, which will lead to an increased public-debt ratio, and added that risks to government finances remain skewed to the downside. "The eventual cost of bank restructuring will exceed the government's current assumptions, leading to a further increase in the public debt ratio," the ratings agency said.

Moody's also cited continued concerns over the ability of the Spanish central government to generate sustainable and structural improvement in general government finances because of its limited control over regional governments' spending and expectations of slow economic growth.

Source: Wall Street Journal