A double-notch downgrade to Spain’s credit ratings has piled more pressure on European leaders to make rapid progress on solving the region’s debt crisis or face unbearable borrowing costs.
The fresh blow from Moody’s Investors Service came just a day after the agency warned France its “Aaa” rating could be at risk.
“If the eurozone can’t figure a way to handle the situation, you are going to see Spanish yields continue to go up and they are going to have a problem to fund themselves,” said Jessica Hoversen, currency and fixed income analyst at MF Global in New York.
Investors are counting down to a summit of EU leaders this weekend that was originally hailed as a watershed event.
Moody’s cut Spain’s bond rating to “A1,” from “Aa2,” the third of the major agencies to act in recent weeks and taking it a notch below the ratings of Standard & Poor’s and Fitch.
The ratings agency’s reasoning made worrying reading for those hoping for a speedy resolution to the country’s troubles.
“Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged and it will in any event take time for confidence in the area’s political cohesion and growth prospects to be fully restored,” the agency said.
In the meantime, Spain’s large sovereign borrowing needs, heavily indebted banking system and challenging growth outlook left it vulnerable to further downgrades, a judgement that would encompass all too many of EU members.
Markets have been on edge for fear European leaders would not agree on a plan to address the crisis, which has already forced Greece, Ireland and Portugal to seek bailouts and has driven up borrowing costs in Italy and Spain.
Greek unions began a 48-hour general strike yesterday, the biggest protest in years, as parliament prepares to vote on sweeping new austerity measures designed to stave off default.
France saw its borrowing costs jump on Tuesday after Moody’s warned it might slap a negative outlook on the country’s “Aaa” rating in the next three months if slower growth and the costs of helping to bail out banks stretch its budget too much. French Finance Minister Francois Baroin said the rating was not at risk.
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