Moody's cuts Italy, Spain and Portugal's credit ratings

Italian protester Moody's says weak growth could hamper Europe's efforts to reform and cut debt

Italy, Spain and Portugal are among a number of eurozone nations to have had their credit ratings lowered by ratings agency Moody's.

The agency also downgraded Slovakia, Slovenia and Malta.

Moody's also put France, Britain and Austria on "negative outlook", which implies there is a 30% chance of a downgrade in the next 18 months.

It said weak growth in Europe was hampering efforts to deliver economic reform and austerity measures.

'Odd' decision

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Didn't the reaction to the US downgrade by Standard & Poor's last summer, and even the same agency's mass downgrade of eurozone countries last month, demonstrate that the days of worshipping at the AAA altar were past?”

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Moody's delivered the sharpest downgrade to Spain which had its rating lowered two notches to 'A3'.

Italy was cut by one notch to 'A3' and Portugal was lowered by a smaller margin - a step to 'Ba3'.

In its report the agency attributed its moves to "the uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework".

It also questioned whether European leaders would assemble the firepower needed to deal with the crisis.

Spain has criticised the decision, citing Moody's own welcoming of Spanish financial reforms.

"They say that yes, they welcome them [the reforms] and then they decide the opposite according to their criteria, it is fairly paradoxical," Finance Minister Cristobal Montoro said.

"It is good, they do their work, their valuations, but the truth is that it is a bit contradictory," he told Onda Cero radio.

"They take a decision in which they say: 'We value the reforms they are making but they are not going to achieve their goals'," Montoro added.

"But what goals? The goal of returning to economic growth and employment? It seems to me that we are making the reforms."

The BBC's economics editor, Stephanie Flanders, questioned the timing of the downgrade move.

"Some will consider the decision odd, coming after a couple of months when the fear in European financial markets has been lifting, and the outlook for the US and broader global recovery has been getting a fair bit brighter. The UK government's cost of borrowing is still at an historic low."

Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

In January, one of the other big three credit rating agencies, Standard and Poor's, downgraded France's top-notch AAA rating. It also cut the credit ratings of Italy, Spain, Cyprus and Portugal.

S&P blamed the failure of European nations to deal with the debt crisis for the move.

The latest set of downgrades from Moody's was greeted with a muted reaction on the financial markets, with many analysts not surprised by the move.

Against the dollar, the euro dipped 0.1% to $1.3179.

"Anyone observing the markets had to expect further rating agency downgrades and in the end Moody's only followed S&P's previous step," said Commerzbank analysts in a note.

Despite the downgrades, both Italy and Spain paid less to borrow money at their latest bond auctions on Tuesday.

Italy raised 6bn euros in an auction of medium-term bonds in which rates fell, according to the Bank of Italy.

Rates on bonds maturing in 2014 dropped to 3.14% from 4.83%.

The Italian Treasury had been expecting to raise between 3.75bn and 6bn euros. Total demand was 9.5bn euros.

Speaking about the Italian auction, Marc Ostwald, strategist at Monument Securities in London, said: "Put very, very simply that's an excellent set of results.

"They've sold the full amount that they wanted to sell. One might question why they didn't do more, given that they've got such a lot to do but I suppose there's a certain degree of confidence there as well that they're not going to have problems, and why should they frontload?"

Spain's borrowing costs also fell as it raised almost 5.5bn euros in an auction of 12- and 18-month bonds.

Comparing rates with a similar auction four weeks ago, the amount the country had to pay investors fell to 1.89% from 2.04% for the 12-month bonds, and to 2.30% from 2.39% for the 18-month bonds.

However, Moody's downgrade action is being seen as another reminder of challenges faced by European policymakers.

"The picture is very bleak. The economies in the eurozone aren't improving. Italy in the fourth quarter of last year has gone deeper into recession. [In] Spain there's also no growth this year, [and] the unemployment numbers have been rising." said Martin Hennecke, associate director of Tyche Group.

Moody's hit Spain with the biggest cut in credit worthiness. It blamed a bigger-than-expected deficit in 2011, caused by debts among Spain's regional governments.

"Overall, the adjustment required to bring the public finances back onto the targeted path (a budget deficit target of 4.4% of GDP in 2012) is unprecedented," Moody's said.

Moody's Rating Action

Country Old rating New rating Change




Outlook to negative




Outlook to negative




Down one notch




Down one notch




Down one notch




Down one notch




Down one notch




Down two notches




Outlook to negative

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