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Moody’s Spanish Downgrade Could Impact Entire Eurozone

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Moody's Spanish Downgrade Could Impact Entire Eurozone

 

Moody’s Corporation (NYSE:MCO) is set to downgrade a wide range of Spanish banks according to a Wall street Journal article earlier today. The report asserted that the ratings agency had notified several Spanish banks of the downgrades, which could be announced as early as today, or might follow later on in the week.

The changes could be reflected in drops of two to three notches in the country’s banks and would follow a downgrade of Spanish sovereign debt by Moody’s earlier in the month. The ratings change, though, expected, might exacerbate the current situation in Spain, and make its effect known across the entire Eurozone.

Earlier in the month, after it was revealed that Spain’s banks were in a great deal of trouble, a 100 billion euro package was announced to take them out of their fugue. That bailout has saved the banks for now, but the country, and the whole region, faces problems that are still a great distance from being solved.

The downgrade of the banks means it will be much more difficult for them to go to the markets in order to secure funding. They currently have a buffer from that need in the form of the European rescue package but borrowing costs in the country will remain high.That will not help the country to grow in the short or medium terms.

Spain is facing 25% unemployment, and a much bigger number when that is focused on youth unemployment. Spain needs to grow, and Moody’s downgrade, though justified, will hamper any attempt to grow. That is likely to be repeated across the Eurozone.

Moody’s has been the most aggressive of the ratings agencies in hitting the debt of major European institutions and sovereign entities. The firm recently downgraded many German and Austrian firms. The banks’ main troubles were Eurozone specific, and not related to specific problems with the banks themselves. Italy’s banks were downgraded on that, as well as specific Italian problems.

With the lack of any significant solution on the horizon, Moody’s may continue to cut the ratings on European institutions. It may continue to hack away at the ratings of those that know no crime but proximity. Debt and financial crises in four or five country’s are no longer the problem in Europe. Moody’s recognizes that.

As borrowing costs increase across the Eurozone so will the pressure on individual countries. As discussed before, the European Financial Stability Fund, and its sister the European Stability Mechanism will be sorely lacking in the advent of a real crisis.

The Eurozone is stuck in the midst of real problems at the moment. There is no solution in sight. As long as the market remains unsatisfied with the progress soon a solution there is danger of downgrades. Though those downgrades have hit Spain today there is no reason, given Moody’s history, that they won’t hit France, Italy, Germany, Austria or Belgium tomorrow. Europe is walking a tightrope, and each downgrade is a fraying on one end. The next summit will inform of the next step.

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