Moody’s warned Friday that it might further reduce Spain’s rating, currently at Aa2, citing the country’s regional governments’ inability to get their debt loads under control. The central government’s austerity program will fail to reduce the nation’s debts if regional governments cannot keep up.
Reuters reported that the ratings agency was concerned that regional governments would miss their deficit reduction target by as much as 0.75% of GDP. That would get in the way of the central government’s ability to make its austerity program meet its own goals.
In a release, Moody’s said, “Regional governments’ finances may prove difficult to control due to structural spending pressures, particularly in the health
care sector.” Its assessment is an indication that concerns over contagion throughout the euro zone have not abated in the wake of a second rescue package for Greece. Spanish bond yields rose and are now at 6.11%; 7% is considered unsustainable.
While the Spanish Treasury disputed Moody’s assessment, saying in the report, “Moody’s assumes that the current high yields that have been generated by the resolutions around the Greek crisis will become a permanent burden on non-AAA sovereign funding costs,” Moody’s did also say that a ratings cut for Spain would likely be limited to a single notch.