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Moody's lowers Spain's credit rating by 3 notches

June 14, 2012

Moody’s cut the government debt rating of Spain by three notches to Baa3 from A3 and said the rating is on review for possible further downgrades due to the government’s very limited access to debt markets and the weakness of the national economy. “The continued weakness of the Spanish economy makes the government’s weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years,” Moody’s commented.

Italy’s borrowing costs surged at its latest auction of treasury bills, pointing to investors’ fear of an accelerated contagion risk from the European debt crisis. The Italian treasury had to offer investors 3.972% for a one-year bill, a six-month high, compared to 2.34% at the previous auction May 11. However, demand was strong and Italy collected some €6.5 bn. Today, Italy will auction up to €4.5 bn of longer-term new debt when overall the mood is one of caution ahead of the Greek elections on Sunday. Global equity markets also remain cautious due to the high level of unease over whether Spain’s problems could spread to Italy and whether Greece will remain in the euro zone after the upcoming election. Italian prime minister Mario Monti secured the backing of Italy’s political party leaders to back his tough economic medicine to avoid Italy becoming the next victim of the euro debt crisis, after a bailout for Spain’s banks failed to calm markets. “We should use these new difficulties to double our efforts both on the European front and within Italian politics,” Monti told parliament in Rome. German finance minister Wolfgang Schaeuble told Italian newspaper La Stampa that if Italy continues along Monti’s path there will be no risks. Italy had made huge progress under Monti’s technocrat government, which has taken austerity measures and launched pension and labor market reforms since taking office in November. Meanwhile, Spanish prime minister Mariano Rajoy said that while each country had to take its own measures to clean up public finances and reform the economy, only closer European integration could solve the crisis.