The euro fell to $1,4261 and German Bunds soared after Moody's put the Spanish government's Aa2 bonos on watch. The weak growth of the country and the high cost of financing, which is expected to continue to be high, are pushing the agency towards this decision. Eurozone leaders' deal on Greece signed last week was not enough to ease the strain on markets and Spanish government bond spreads over German Bunds continue to widen, opening at 354 basis points this morning.
Spain's rating still offers a high degree of investment, much higher than that of Greece, Portugal and Ireland. Moody's Aa2 is in line with S&P's two AAs, while Fitch puts it even higher with AA+. Moody's says any cut for Spain would be limited to a single notch but said the package for Greece signaled a clear shift in the risk of government bond holders across the Eurozone.
The rating agency notes that "the challenges of a long-term equilibrium of the state balance depend on the weak growth of the Spanish economy and the fiscal lag in some of its regions and local government sectors". In fact, Moody's has already cut the rating of 6 Spanish regions. Catalonia went from A3 to BAA1 (the worst rating of all Spanish institutions), while the other affected regions were: Castilla La Mancha (from A2 to A3), Murcia (from A2 to A1), Valencia (from A2 to A3), Andalucia and Castilla y Leon (from Aa2 to Aa3).
International investors fear that the eurozone's fourth-largest economy, crippled by anemic growth rates and high unemployment, will fail to get its finances in order and will need a Greek-style bailout. The Spanish government has set a target for this and next year it sees a fiscal deficit of 1,3% of GDP for the 17 regions, but some of their presidents say that will be impossible due to fiscal management by previous leaders.
As expected, the agency threatened to downgrade the ratings of three Spanish banks: BBVA, CaixaBank and La Caixa.
