Eurozone’s Prospects Sink as Spain Downgraded Again

NEW YORK—The European debt crisis—which has now turned into a full-blown fiscal, banking, and political crisis—has taken a turn for the worse as Spain and Cyprus suffered credit rating cuts by Moody’s Investors Service this week.

Moody’s has cut Spain’s rating by three notches from A3 to Baa3, citing the nation’s worsening debt burden, rampant unemployment, and shrinking access to capital sources.

It also cut the bond rating of Cyprus from Ba1 to Ba3, a two-notch drop. Cyprus has extensive cultural and economic ties with Greece, which is facing the possibility of default.

Moody’s is pessimistic on Spain, calling its economy “an unsustainable situation.”

“In the absence of positive developments that shore up investor sentiment, such as a resumption of growth or rapid progress in achieving fiscal consolidation objectives, neither of which is likely in the current environment, the government is likely to become increasingly constrained with regard to the terms under which it is able to refinance maturing debt,” Moody’s said in a report released Wednesday.

Spain’s credit rating was put on negative review even before it received the underwhelming 100 billion euro ($125 billion) bailout announced last week to shore up its teetering banking sector.

With the nation’s debt load, an unemployment rate close to 25 percent, and a banking sector saddled with worthless real estate bonds, relief is far off.

More warnings were issued by independent credit rating agency Egan-Jones this week. Sean Egan, founder and president of the company, warned in an interview with CNBC that both Spain and Italy would require full-scale bailouts within six months.

Egan said that the poor state of those nations’ banks is indicative of the even poorer state of those nations’ finances. “It makes little sense to separate the banks’ credit quality from the governments’ credit quality because quite often, they support each other and that’s certainly the case in Italy and Spain,” Egan said on CNBC’s “Squawk Box” show.

Italy currently holds the highest debt-to-GDP ratio among all eurozone nations, with public debt exceeding 120 percent of its annual GDP. Analysts agree that the eurozone is stuck in a Catch-22 situation as its most financially challenged nations must scale back spending and implement austerity measures to balance their budgets and decrease their debt loads, yet these same measures severely hamper economic expansion and growth.

This weekend’s Greek elections—on June 17—will be closely watched across the region, as Greek citizens will have a say in whether the nation stays a member of the eurozone. Greece’s Syriza party, which is against the current bailouts, is looking to form a new government by defeating the New Democracy Party, which supports the current austerity measures. The nation’s decision could have lasting consequences for the 17-nation bloc sharing the common euro currency.

Officials from G-20 nations will convene in Los Cabos, Mexico, on June 18, with Europe at the top of the agenda. There, eurozone leaders will have an opportunity to discuss the crisis with heads of other nations, perhaps with a plan to go forward with a closer fiscal and political union among member nations. Spain, with limited access to the capital markets, has strongly pushed for fiscal and political unity.

On June 28 and 29, European leaders will head to Brussels for the European Union Summit. So far, sentiments across the region have shown an urgency to draft closer fiscal and banking integration. One could only hope that by then, it is not too late.

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