Downgrades Drive Spanish Bond Yields Higher

Five regions in Spain were hit by ratings downgrades by Moody’s, sending yields higher and prices lower on Spanish bonds at a Tuesday sale. The Spanish economy also showed further contraction.

Moody’s announced late Monday that it had decided to cut the ratings of the five regions by one or two notches, citing limited cash reserves and bond repayments that are coming due—as well as, for four of the five, “significant reliance on short-term credit lines to fund operating needs.” Andalucia, Extremadura, Castilla-La Mancha, Catalunya and Murcia all saw ratings drops, while other regions were confirmed at their existing levels.

The news sent bond yields higher and prices lower at a Tuesday sale, although demand was in line with its maximum target, and Bloomberg reported that other economic news was bad as well: for the fifth straight quarter, the Spanish economy contracted, with GDP falling 0.4% in the three months through September from the previous quarter. According to the Bank of Spain, that matches Q2’s rate of contraction.