Spain hit by debt downgrade; Moody's cites banks

(AP) – March 10, 2011

MADRID (AP) — Moody's downgraded Spain's credit rating on Thursday, citing worries over the cost of the banking sector's restructuring, the government's ability to achieve its borrowing reduction targets and grim economic growth prospects.

The agency reduced Spain's rating by one notch to Aa2 and warned that a further downgrade is possible if indications emerge that Spain's fiscal targets will be missed, and if the public debt ratio increases more rapidly than currently expected.

Moody's Investors Services also warned that concerns could rise if funding requirements for Spain's troubled savings banks — called cajas — end up greater than anticipated. They have been hit particularly hard by the nation's real estate bubble that burst, saddling them with billions of euros in bad loans.

On the plus side, Moody's noted the government's resolve in dealing with its problems and added that Spain's debt sustainability is not under threat.

Spanish Finance Minister Elena Salgado said the government agrees that the nation must make a better effort to push debt-laden regional governments to reduce their deficits, but added that Moody's should have waited to issue its report until the Bank of Spain later Thursday issues detailed breakdown on how much money the cajas need.

Spain's main stock index sank 1.3 percent after the report was released, and the yield on Spain's ten-year bonds rose 0.01 percentage point to 5.50 percent.

One of the main reasons for the downgrade was Moody's expectation that the eventual cost of recapitalizing the cajas will be much more than the government's current projections. While the government has previously estimated they need at most euro20 billion ($27.8 billion), or less than 2 percent of Spain's gross domestic product, Moody's predicted the cost could reach euro40-50 billion and might eventually come in at a massive euro100-120 billion.

The Spanish government is trying to get a handle on its borrowings by reducing spending and raising taxes, and reduced its budget deficit by around two percentage points last year to 9.2 percent of national income.

But unemployment has shot up to more than 20 percent amid predictions of gloomy economic growth, and Spain is also being clobbered by high oil prices sent skyrocketing by the unrest in Libya.

"Spain's vulnerability to market disruption remains elevated given the high funding requirements, not only for the sovereign but also for the regional governments and the banks," Moody's said.

The big worry in the markets is that Spain will get sucked into Europe's debt crisis, which has already seen Greece and Ireland get financial bailouts from their partners in the EU and the International Monetary Fund. Portugal is widely expected to be next.

Most analysts think that the EU can contain the government debt crisis, even if Portugal is forced to tap a bailout fund. However, Spain has the eurozone's fourth largest economy and could test the limits of the existing bailout fund — the European Financial Stability Facility, or EFSF. That would potentially put the euro project itself in jeopardy if governments don't put up more cash.

"It remains essential that the EFSF is bolstered to reassure markets that there is enough ammunition to protect monetary union against all eventualities," said Jane Foley, senior currency strategist at Rabobank International.

Earlier this week, Moody's Investor Services cut its rating on Greece, prompting a sharp tirade from the Greek government about the role of credit rating agencies.

The downgrades have come amid signs that Europe's debt crisis is flaring up again ahead of the March 24-25 summit of EU leaders in Brussels. Portugal's cost to borrow 10-year bonds stands near a euro-era record.

Though a "comprehensive solution" to the debt crisis has been trumpeted, there are growing fears that the 17 countries that use the euro will not agree a revamped bailout mechanism, set new rules on budget deficits and a system of support funds to flow from richer countries in the single currency bloc to the poorest.

Moody's had put Spain on notice for a downgrade in December.

Pylas reported from London.

Escalating national debt threatens future

By Edgar Ortiz

Atlanta Journal-Constitution

February 13, 2011

The future of America can’t be built on the foundations of debt, deficits and lack of fiscal discipline.

Ensuring the prosperity and sustained growth of the American economy requires federal, state and local governments to make serious and drastic changes to their profligate spending habits.

Current levels of government spending can’t be maintained, and at their current rate, threaten our economy, way of life and national security.

Deficit spending has been a financing tool widely used by both political parties in Washington.

The growth of the national debt paints a grim and sobering picture of what we are passing down to future generations:

● The national debt has nearly tripled over the last decade, growing from $5.5 trillion in 1998 to more than $14 trillion in 2011.

● In fiscal year 2010, Washington ran a budget deficit of $1.3 trillion, the largest since World War II, for a record spending of $30,000 per U.S. household.

Another major reason for concern is the increased dependency of our federal government on foreign lenders to pay for our spendthrift ways. Foreign lenders own more than 49 percent of the U.S. public debt.

Records show some of the largest holders of our debt are foreign governments whose policies and economic ambitions may be on a collision track with our best interest.

Research by economists Kenneth Rogoff and Carmen Reinhart puts the spotlight on the impact of high levels of debt on the economy. Their findings show that debt weighs heavily on GDP growth. Once a nation’s public debt exceeds 90 percent of GDP, the “tipping point,” the growth rate of the economy slows down by 1 percent.

The U.S. economy with a debt to GDP ratio of 84 percent is approaching this critical threshold.

The looming state, local and pension fund imbalances could easily push our debt levels beyond this critical point and this doesn’t bode well for our economic future, lower unemployment and a sustained recovery.

The key question is then, what’s the solution?

If history is a guide, research by the McKinsey Global Institute can help us find the answer. Their analysis of 32 episodes of deleveraging that followed a financial crisis shows that responses to a crisis fit into one of the four archetypes:

1. “Belt Tightening”

2. “High Inflation”

3. “Massive Default”

4. “Growing Out of Debt”

Although historically, “Belt Tightening” was the most common response, there is no credible signal from Washington of a legislative strategy to reign upon government spending — making the required cuts to entitlement programs (Medicare, Medicaid, Social Security), eliminating perks, increasing taxes and shrinking the size of government.

The likelihood of “Massive Default” is extremely low, but things could change and “Growing out of Debt” is a nice, theoretical discussion.

The most likely scenario, given the Federal Reserve predilection for keeping interest rates low via quantitative easing programs is “High Inflation” (printing money).

Each tax dollar that goes to pay for interest on the debt is a missed opportunity to invest in America’s future, improve its schools, update its aging roads and bridges, invest in innovation and find new sources of energy to lessen our dependency on external energy sources.

In our present course of spend now, pay later, we are not being fair to future generations. It is not part of the American character that built the most affluent and freest nation on earth. They deserve better. We need to live within our means and pay for our own expenses.

Edgar Ortiz is founder and CEO of Strategic Analytic Solutions LLC, an Atlanta-based consultancy in business planning, strategic marketing and information-based strategies.