October 19, 2011

More Downgrades Hit Spain, Italian Banks

Third time Spain has seen a downgrade; 24 Italian banks cut

Spain was hit on Tuesday with its third downgrade in 13 months as Moody’s Investors Service dropped the troubled country’s rating two notches and left the outlook negative. Italy did not escape the day unscathed, either, as Standard & Poor’s hit its banking system, downgrading 24 banks and the nation's Banking Industry Country Risk Assessment as well.

In a Bloomberg report, Moody’s said of its action that the “continued vulnerability of Spain to market stress” and lower prospects for growth were fueling an increase in the cost of borrowing. In a statement, it said, “Moody’s is maintaining a negative outlook on Spain’s rating to reflect the downside risks from a potential further escalation of the euro-area crisis.” Spain was cut to Moody’s fifth-highest investment grade, down two levels from Aa2 to A1 with a negative outlook.

Spain called the action unwarranted and more due to the eurozone crisis than its own economic woes. “The Spanish Treasury believes that this rating action may be motivated more by a short-term reaction to negative news about the eurozone debt markets than by an analysis of Spain’s medium- and long-term fundamental outlook,” it said in a statement. Moody’s had said in July that any further downgrades would likely be “limited to one notch.”

However, Moody’s also said when announcing the downgrade, “Even if policy action at the euro-area level were to succeed in the short term in returning some degree of normality to bank and sovereign debt markets in the euro area, the underlying fragility and loss of confidence is deep and likely to be sustained.”

S&P said of its action regarding Italy’s banks, “We think funding costs for the banks will increase noticeably because of higher yields on Italian sovereign debt. Furthermore, higher funding costs for both the banking and corporate sectors are likely to result in tighter credit conditions and weaker economic activity in the short-to-medium term.”

It added, “Funding costs for Italian banks and corporates will remain noticeably higher than those in other eurozone countries unless the Italian government implements workable growth enhancing measures and achieves a faster reduction in the public-sector debt burden.”

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