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Spain regional governments’ debts out of control; Moody’s downgrade warning

Friday, July 29th 2011 - 18:46 UTC
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“Regional finances may prove difficult to control” because of spending pressures says Moody’s “Regional finances may prove difficult to control” because of spending pressures says Moody’s

Credit rating agency Moody's, on Friday, put Spain on review for a possible downgrade, adding to concerns that a Greek rescue package has done little to halt the spread of Europe's debt crisis.

Moody's move to place the Aa2 government bond rating on review cited concerns over growth and said funding costs would continue to be high in the wake of Euro zone leaders' bolder moves to curb the Greek crisis last week.

That added to a sense that Spain - and Italy - are still firmly in the firing line, and the Euro and Spanish bond prices fell in response.

Particular focus rested on Spain's regional governments, many of whom are struggling with burgeoning debt loads after a decade of reckless spending. Analysts fear control over regions' debt loads is slipping out of the central government's grasp.

Regional authorities will miss their collective budget deficit target by up to 0.75% of GDP, Moody's said, hampering the central government's program of austerity to reduce the overall shortfall.

“Regional governments' finances may prove difficult to control due to structural spending pressures, particularly in the healthcare sector,” Moody's said in a release.

International investors are concerned the Euro zone's fourth largest economy, hamstrung by anaemic growth rates and high unemployment, will fail to put its fiscal house in order and need a Greek-style bailout. Nerves about that have sent bond yields to their highest level in over a decade.

Moody's current rating for Spain is in line with fellow rating agency S&P's AA setting, while Fitch Ratings has the country one notch higher at AA+.

The Euro fell against the dollar in response and Spanish bond yields rose. Spain's cost of borrowing over ten years is now 6.11% compared to the 7% level broadly seen as unsustainable for the Euro zone governments at risk in the crisis.

The country's rating remains at a high investment grade, far above those of Greece, Portugal and Ireland.

Categories: Economy, International.

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