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Moody's downgrades Spain

On 10 March, Moody's Investors Service lowered Spain's Aa1 credit rating to Aa2, with a negative outlook, amid concerns about the country's mounting debt and the cost of restructuring the financial system. The announcement came in shortly before the Bank of Spain published its EUR 15 billion estimate of the capital needs for 12 financial institutions. However, the agency estimated that restructuration costs are likely to reach EUR 50 billion if the new capital requirements are to be met. Shortly after the announcement, the yield on Spanish 10-year bonds reached 5.55%, a level last seen in 2000. The institutions that the Bank of Spain has ordered to increase their capital include eight saving banks (Bankia, Novacaixagalicia, CatalunyaCaixa, Banco Base, Banca Civica, Mare Nostrum, Unnim and Caja Espana-Duero) and four commercial and investment banks (Bankinter, Barclays, Deutsche Bank and Bankpyme). Moreover, on 25 March, Moody's Investors Service downgraded the rating for 30 of the smaller Spanish banks, while the country's largest banks (Banco Satantander, BBVA and La Caixa) escaped unaffected. In the latest economic projection published by the Bank of Spain on 30 March, the Bank maintained its GDP growth forecast unchanged at 0.8% for this year and 1.5% for 2012. These projections are below government expectations of a 1.3% expansion this year and growth of 2.5% in 2012, which suggests that the government might not meet its public deficit targets of 6.0% of GDP for this year and 4.4% of GDP for the following year.


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