Moody’s downgrades Spain’s credit rating, warns France on risks

Moody’s Investors Service downgraded Spain’s credit rating Tuesday and warned that France’s rating could also be at risk, citing both nations’ vulnerability as Europe struggles to manage its persistent debt crisis.

In cutting Spain’s rating by two notches, Moody’s said that since it began reviewing the nation’s ratings in July, no resolution to the debt crisis has emerged and that worsening outlooks for global and European growth are hampering Spanish prospects, the Associated Press reported. That will make it harder for the country to achieve its targets for reducing its budget deficit.

The Moody’s downgrade comes four days after Standard & Poor’s cut its rating on Spain’s long-term debt, the AP said. Fitch Ratings cut Spain’s rating Friday.

Moody’s said that even if a solution to Europe’s crisis is reached, it will take time for confidence in the nation’s political cohesion and growth prospects to be fully restored, AP reported.

“In the meantime, 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,” the ratings agency said.

Moody’s also warned earlier Tuesday that France’s promise to back a European rescue fund could put the nation’s own credit rating at risk. The release of the agency’s annual credit report on France quickly put French officials in a defensive stance as they prepared for a critical week of talks on Europe’s financial crisis.

French Finance Minister Francois Baroin said in Paris that the country would “do everything” needed to maintain a triple-A bond rating. A strong credit rating is necessary “to keep interest costs down and finance France’s ‘social model,’ ” Baroin said, according to wire service and other reports from the country.

It is also needed to support the new bailout fund, the European Financial Stability Facility, being set up to support economically weaker nations such as Italy and Spain. In its analysis, Moody’s pointed out the circular nature of the new program: It will rely on borrowed money, using the strong credit standing of France and Germany to get low interest rates. If the program weighs on France’s finances enough to prompt a downgrade of its credit standing, it could put the success of the bailout fund itself at risk, the agency said.

The likelihood that France may also have to borrow to put more capital behind its banking system could also affect its credit rating, Moody’s said.

The analysis did not downgrade France’s credit, saying that overall the country remains economically strong and worthy of a top rating. But it also said that France is “the weakest” of Europe’s triple-A nations and that its obligations under the new bailout and bank programs could cause trouble. A slowdown in economic growth could also make it harder for France to reach its deficit-reduction targets.

As the second-largest economy in the 17-nation euro region, France is responsible for about $200 billion of the planned $600 billion rescue fund — an amount equivalent to about 8.5 percent of France’s annual economic output. The money might never be needed. But if Italy or Spain require help, France might have to pay up quick.

“The economic, financial and political situation in France points to a very low risk of a sudden and sharp” drop from a AAA rating, Moody’s said. However, “the potential for further contingent liabilities to emerge” — such as support for other euro-zone nations or for its banking system — is “exerting pressure on the stable outlook of the government’s AAA debt rating.”

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