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Moody’s cuts Spain’s credit rating over growth fears

By Victor Mallet in Madrid

Published: September 30 2010 08:24 | Last updated: September 30 2010 08:50

Moody’s, the credit rating agency, downgraded Spain’s government bonds on Thursday, citing weak economic growth, a deterioration of financial strength and higher borrowing needs.

The downgrade by Moody’s by one notch from its top rating of AAA to Aa1 makes it the last of the three big rating agencies to downgrade Spain as a result of the global economic crisis.

The downgrade, which was also applied to Spain’s Fund for Orderly Bank Restructuring, known as Frob from its Spanish initials, comes with a stable outlook.

“Over the next few years, the Spanish economy is likely to grow by only about 1 per cent on average,” Kathrin Muehlbronner, a Moody’s vice-president and lead analyst for Spain, said in a statement issued by the agency.

Although the downgrade was anticipated in the financial markets, it will disappoint Elena Salgado, Spanish finance minister, who had hoped that Moody’s would diverge from Standard & Poor’s and Fitch and leave Spain in the top tier of creditworthy nations.

Apart from sluggish growth prospects, Moody’s cited Spain’s challenges in reducing its annual budget deficits, which the government has said it will cut from 11.1 per cent of gross domestic product in 2009 to 6 per cent of GDP next year, and 3 per cent in 2013.