Spain shrugs off fresh downgrade amid euro fears

(MADRID) - Spain leapt Wednesday to reassure investors it can pay its debts after a third rating agency downgraded its sovereign debt and warned it is at high risk from the eurozone crisis.

With European leaders seeking an urgent and lasting solution to the debt crisis, Spain -- seen by economists as a fiscal weak link in the eurozone -- chalked up a hat-trick of downgrades by all the three big ratings agencies.

Moody's on Tuesday cut Spain's rating by two notches to A1 from Aa2, with a negative outlook, "to reflect the downside risks from a potential further escalation of the euro area crisis."

Spain's Treasury challenged the move, saying in a letter to investors the downgrade "may be motivated more by a short-term reaction to negative news about the eurozone debt markets" than by long-term fundamentals.

"The nation's significant deleveraging has significantly reduced its external financing needs," the Treasury said. "The Spanish government remains committed to fiscal consolidation and structural reform."

The Moody's downgrade came days after Standard & Poor's cut Spain's sovereign rating to AA-minus from AA, with a negative outlook. Fitch Rating slashed Spain's rating by two notches less than two weeks ago.

Citing slow growth and high levels of debt and unemployment, Moody's warned that Spain was likely to suffer particularly hard from a further economic slowdown.

"The already moderate growth prospects for Spain have been scaled back further in view of the worsening global and European growth outlook," Moody's warned in its downgrade note.

"Spain's large sovereign borrowing needs as well as the high external indebtedness of the Spanish banking and corporate sectors render it vulnerable to further funding stress."

Spain has suffered since 2008 from the global financial crisis and the bursting of a domestic housing bubble that year. Unemployment is at more than 20 percent and big spending cuts are hitting healthcare and education.

It holds an early general election on November 20 in which the ruling Socialist Party government is widely expected to be chased out by the conservative opposition.

The government has officially stuck to its economic growth target of 1.3 percent for 2012 despite warnings by economists that activity is slowing and that instability in Greece, which is nearly bankrupt, could spread to Spain and Italy.

Moody's forecast Spanish economic growth of "one percent at best" in 2012, compared with earlier forecasts of 1.8 percent, saying Spain, in particular its regional authorities, would struggle to meet targets for lowering the deficit.

Moody's has also downgraded the debt of Italy and warned of a downgrade for Belgium over similar concerns.

Analysts warned the hardship could worsen if EU leaders, meeting at summit on Sunday after two days of EU and eurozone talks, fail to end a debt crisis which is undermining the stability of the euro.

"If no solution is reached, Spain could suffer," said Jesus Castillo, a southern Europe analyst at Natixis bank.

"There will be stronger pressure from the markets and therefore higher financing costs which lead to a weakening of its financial situation."

The EU leaders are expected to agree to force banks to recapitalise as part of a plan to end the growing crisis. The head of top Spanish bank Santander, Emilio Botin, complained Tuesday that this would deepen market concerns.

The Madrid stock market was stable in afternoon trading on Wednesday following the downgrade as investors waited for news of the European crisis efforts.