Spain fights downgrade

"We do not agree" was the thrust of the Spanish government's reaction after a third ratings agency downgraded the country's sovereign debt late on Tuesday.

Moody's cut Spain's rating by two notches from Aa2 to A1 and gave the nation a negative outlook, citing its ongoing vulnerability to market stress and slow growth prospects, among other things.

"Lower economic growth will make the achievement of ambitious fiscal targets even more challenging for Spain," Moody's said.

But an official from the Spanish Economy Ministry was quoted by the AFP news agency as saying the downgrade "contradicted" Moody's positive acknowledgment of a constitutional deficit cutting measure last month.

Spain's treasury also attacked the assessment saying it was likely "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."

"[We] remain committed to fiscal consolidation and structural reform," said the treasury statement.

Spain's credit rating is now lower than that of Slovenia and Moody's predicts economic growth of "one percent at best" in 2012.

Year of decline

The downgrade brings a year of decline from Spain's top triple-A status to a critical political point.

Fitch was the first ratings agency to downgrade Spanish sovereign debt by two notches earlier this month.

It was followed by Standard & Poor's last week, which cut the nation's sovereign rating from AA to AA-minus, with a negative outlook.

The three-pronged downgrade has unsettled Spanish government officials, who face an early general election on November 20 - and an almost certain removal from office. Polls show the conservative opposition Popular Party will likely win.

Crucial EU summit

Spanish Economy Ministry officials would have preferred Moody's to have waited until after a crucial summit of European Union leaders later this week on October 23.

"Their main argument concerns instability at a European level," the same official, who asked not to be named, told AFP. "So it is surprising that [Moody's] did not wait a few days to see the solution."

The meeting is being seen as an eleventh hour opportunity for the 17 nation eurozone to find a solution to its growing debt crisis, with Italy having also faced a recent downgrade and the Greek economy showing few signs of improvement.

Spain was hit hard by the global financial crisis and the end of the domestic housing bubble in 2008.

Unemployment is at 20 percent and remains a target of criticism for the opposition.

There have also been popular protests against cuts the government has made, which have affected health and education.

Speaking at its annual conference earlier this month in Malaga, Popular Party leader Mariano Rajoy said Spain was going through a "serious social, economic and institutional crisis" which would demand a "great effort" in future.

But he has yet to set out his party's economic policy.

Author: Zulfikar Abbany (AFP, Reuters)
Editor: Sam Edmonds