Spain's hurting economy hit with debt downgrade

[September 30, 2010]  MADRID (AP) -- Spain's hurting economy got hit again Thursday with yet another downgrade of its government debt by a major ratings agency, meaning the nation's borrowing costs will likely rise as it struggles to cut its deficit amid gloomy economic recovery prospects.

Moody's Investors Service lowered the rating from Aaa to Aa1, with a stable outlook, and the announcement dragged down stock prices from Asia to Europe.

The downgrade came a day after tens of thousands of Spanish workers staged a national protest against government austerity policies, clashing with authorities, canceling international and domestic flights and disrupting public transportation in the largest cities.

Spain is struggling to emerge from a two-year recession after its construction and real estate sector collapsed, putting an end to a decade-long boom. Experts regard the country as one of the eurozone's most fiscally troubled members, along with Greece, Ireland and Portugal.

Unemployment stands at 20 percent, many businesses are struggling to survive and the London-based Moody's painted a grim picture of the nation's immediate economic future.

"One of the key drivers for Moody's decision to downgrade Spain's rating to Aa1 is its weak growth prospects and the challenge that this presents for fiscal consolidation," said Kathrin Muehlbronner, a Moody's vice president and lead analyst for Spain.

Spain's economy will likely expand about 1 percent annually in coming years, lagging behind growth rates for nations like Britain, France and Germany, she said. The country also faces key challenges in trying to boost low productivity and international competitiveness, Moody's said.

The other two major rating agencies, Standard & Poor's and Fitch, downgraded Spanish debt in late April and late May respectively.

Moody's also said Spain faces worsening debt affordability, or interest payments as a share of revenues, and significant borrowing requirements -- making it vulnerable to market volatility.

Spain's Socialist government has enacted changes that make it easier and cheaper for companies to lay people off, and recent signs of wage restraint in the private and public sectors are positive signs, Moody's said.

But Moody's noted that the cost of letting workers go is still higher that the European Union average.

Alejandro Varela, an analyst at Renta4 brokerage fund managers in Madrid, said investors were expecting the decision and that it will add pressure on the government to retool Spain's economy.

"Moody's couldn't maintain the triple A rating with the Spanish economy in the situation it's in. It doesn't make sense," Varela said.

[Associated Press; By ALAN CLENDENNING]

Associated Press writers Daniel Woolls and Barry Hatton contributed from Madrid and Lisbon.

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