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The state of Spain's beleaguered regional banks were back in the spotlight ahead of a crucial meeting of European Union leaders, as Moody's downgraded the country's credit ratings.
The ratings agency attributed the downgrade to Aa2 from AA1 “with a negative outlook” to the cost of restructuring those banks “warning that it was likely to exceed current assumptions, leading to a higher public debt ratio.
There is a meaningful risk that the eventual cost of the recapitalisation effort could considerably exceed the government's current projections, warned Moody's senior analyst Ms Kathrin Muehlbronner on Thursday.
The cost of recapitalising the banks could be as high €50 billion, more than twice the agency's previous estimate of €17 billion. Under some circumstances the figure could rise as high as €120 billion, warned Moody's.
The downgrade came at the end of a tough week for Europe, as Greece's credit rating was cut by three notches and Portugal struggled with a €1-billion bond auction.
competitiveness pact
On Friday, leaders of the 17 euro-zone countries will meet in Brussels, where they are expected to make headway on a new competitiveness pact focusing on how economic policy can be further integrated, as well as on the shape of future bailouts.
Changes to the terms of the Greek and Irish bailout packages will also be on the cards, particularly following the confirmation of Mr Enda Kenny, the leader of the country's Fine Gael party, as Ireland's new Taoiseach. The competitiveness pact is meant to be finalised before a European Council meeting on the 24-25 of March.
While being home to Banco Santander “one of Europe's strongest banks” Spain is also home to some of its weakest.
The Cajas built up massive exposure to risky loans largely in the real estate and construction sectors, forcing many to turn to the government for support. The Spanish government has already embarked on a process of reform, which will require the banks to have higher capital ratios.
Economy impact
The crisis continues to take its toll on the economy. Spain has the highest unemployment rate in the Euro Zone, “over 20 per cent, and is forecasted to have one of the slowest rates of growth within the region by the Euro Zone” just 0.6 per cent for 2011, according to the IMF.
Moody's said that its concerns extended beyond the banking crisis as it questioned the central government's ability to exercise enough control of regional government to ensure that budget deficit reduction targets were reached.
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