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Spain rating risk driven by deficit, says Moody's

A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011. REUTERS/Mike Segar
A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011. REUTERS/Mike Segar

By Paul Day

MADRID (Reuters) - The likelihood that Spain will miss its public deficit target this year leaves its sovereign rating at risk of slipping below investment grade, credit agency Moody's said on Tuesday.

Spain cut its public deficit to 7 percent of gross domestic product last year, missing its target of 6.3 percent. It is also unlikely to meet this year's target of 4.5 percent and the objective for 2014 will only be met if the government cancels planned tax cuts, the ratings agency said.

"Whilst acknowledging the progress in fiscal consolidation that Spain has achieved at all government levels, the outlook on Spain's government bond rating remains negative given the continued challenges it faces in meeting the deficit targets," Moody's wrote in a note.

Moody's left the outlook on its Spanish rating, which stands one notch above junk at Baa3, at negative, saying the government was losing credibility by missing budget targets and repeatedly revising figures.

Spain was forced by the European statistics agency Eurostat to revise last year's deficit figure up from an initial 6.7 percent after efforts to move rebates into 2013 from last year to boost 2012's final figure were rolled back.

A government source told Reuters the country would now increase its 2013 deficit target to 6 percent of gross domestic product and is negotiating with the European Commission for more time to cut its fiscal gap to 3 percent of GDP, currently targeted for 2014.

In an interview with Reuters, Moody's senior analyst Kathrin Muehlbronner said the public deficit would likely reach around 5 percent of GDP next year though this would be higher if the government continued with plans to reverse tax hikes implemented in 2012 and 2013.

"We expect that the measures, especially on the side of income, which were for 2012 and 2013, will continue in to 2014, that the government won't reduce taxes as they've announced," Muehlbronner said.

"The tax rises were the only reason revenues rose. They can be compensated with other measures, of taxes or spending. But without this, it won't be enough (to reduce the deficit)."

The Spanish government has said in the past that increases in income tax, the removal of a select number of tax deductions, a property tax hike and the removal of special Christmas pays and perks for civil servants would not be renewed in next year's budget.

It is, however, under pressure from Europe to renege on this pledge in order to keep its public finances in check.

(Editing by Julien Toyer)

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