European governments protest latest credit ratings downgrade

Feb 14, 2012, 12:36 GMT

Brussels - European governments on Tuesday protested against the latest downgrade by a major credit ratings agency, while pledging at the same time to continue along the path of budget discipline and economic reforms.

Late on Monday, Moody's downgraded Spain by two notches to A3, while ratings for five other eurozone nations slipped by one position. Italy and Malta's fell to A3, Portugal's to Ba3, and Slovakia and Slovenia's to A2.

Spanish Finance Minister Cristobal Montoro criticized Moody's decision as 'paradoxical' and 'contradictory.'

It does not make sense to downgrade and issue a negative outlook on Spain while at the same time expressing appreciation for the economic reforms its government is pursuing, Montoro told radio station Onda Cero.

However, he admitted that Greece's problems - which is teetering on the brink of bankruptcy as international lenders insist in tough conditions for a bailout - created 'fairly obvious' risks of contagion for countries like Spain, Portugal and Italy.

In Rome, the technocratic government led by Mario Monti did not immediately react to the downgrade - just as it declined to do after similar moves last month by two other US-based ratings agencies, Fitch and Standard & Poor's.

But investors appeared to shrug off concerns, as yields on a 4-billion-euro (5.3-billion-dollar) auction of Italian three-year bonds fell to 3.41 per cent, down from the 4.83 per cent registered in an similar sale on January 13.

In a note, ING Bank said that 'the big negative news is with respect to Spain,' as Moody's cut its rating to the level of Italy's. In contrast, Standard & Poor's considers it to be two notches safer than Italy, while Fitch sees a 1-notch gap between the two countries.

Moody's also issued a negative outlook on the triple AAA rating of Austria, France and Britain.

The Austrian Finance Ministry charged that the agency had not taken into account last week's 26.5-billion-euro (35-billion-dollar) austerity and tax package that is intended to balance the budget and strengthen banks.

Moody's saw the wide exposure of Austria's banks in Central and Eastern Europe as a risk and said it would downgrade the country if the finance sector needed to be bailed out.

'There are currently no indications that such support is necessary,' the Austrian ministry reacted, adding that banks have started strengthening their capital base.

In London, Chancellor of the Exchequer George Osborne interpreted Moody's decision as a vindication of his policy of budget cuts.

'It's a reality check for anyone who thinks Britain can duck confronting its debts ... it's got to confront those problems head-on and that's precisely what I intend to do,' Osborne said in a BBC interview.