Moody's has reignited the storm of controversy over the power of rating agencies after it downgraded Spain, and warned that the bank clean-up will cost vastly more that claimed.
The move comes a day before a crucial summit of EMU leaders to thrash out a "grand deal" intended to create workable machinery for the euro and end the debt crisis once and for all.
Moody's cut Spain's credit by one notch to Aa1 and said Madrid's estimates of €20bn (£17.2bn) of fresh capital needed to rebuild the banks and cajas is too low. "The overall cost is likely to be nearer €40bn to €50bn," rising to as much as €120bn in a "stressed scenario".
Moody's report raises fresh doubts over Spain's ability to fend off contagion as the bond spreads on Greek, Irish, and Portuguese debt reach post-EMU highs.
The country has clawed its way out of the awkward squad over recent months by slashing its twin deficits, and shaking up the labour market, but it remains vulnerable to shocks.
Spanish premier Jose Luis Zapatero dismissed Moody's downgrade as an insult, insisting that the Banco de España alone had the "information, credibility, and truthfulness" to judge the needs of Spanish lenders.
The central bank said on Thursday that 12 cajas (savings banks) and other banks must raise €15.2bn between them by September, led by Bankia (€5.8bn), Novacaixagalicia (€2.6bn), and Catalunyacaixa (€1.7bn).
Moody's praised Spain for its market reforms and said "debt sustainability is not under threat." But it also warned of fresh "episodes of funding stress". The government, regional juntas, and banks must together must raise or roll over €300bn of debt this year.
Fitch Ratings also issued a report concluding that the bail-out costs might spiral, putting the figure at €97bn in an Irish-style "stress scenario" where property losses reach 58pc. The Irish parallel has infuriated Madrid since delinquency rates on Spanish homes are low. Loan-to-value ratios on mortgages average just 62pc.
Spanish officials said it was astonishing that Moody's should drop its bombshell hours before the central bank was due to publish its own far more detailed analysis. "Moody's don't explain how they come up with these numbers," said one source.
European anger over the power of "Anglo-Saxon" rating agencies has been welling for months but has now reached fever pitch. Greece's finance minister George Papaconstantinou wrote on Thursday to the EU authorities calling for restraining action after Moody's cut Greek debt three notches three-notch. "Such unjustified and imbalanced decisions could become self-fulfilling prophecies. Rating agencies must be regulated effectively at a European and world level," he said.
Read the full article here