Moodys warned of a possible downgrade to the country's maximum credit rating, highlighting the rapid deterioration of Spain's economy and public finances $EWP

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MADRID (Dow Jones)--Moody's Investor Service, the last major credit ratings agency to rate Spain Aaa, Wednesday warned of a possible downgrade to the country's maximum credit rating, highlighting the rapid deterioration of Spain's economy and public finances. The move follows Fitch Ratings' downgrade of Spain from the coveted top rating late last month. Standard & Poor's Ratings Service cut Spain to AA, two notches below the top rating, in April. Spain is grappling with the collapse of a decade-long housing boom that is weighing on the country's banks, has sent unemployment soaring to over 20% and opened up a double-digit budget deficit. Following the meltdown of Greece's public finances, jittery investors have become increasingly concerned about the problems in Spain, the euro zone's fourth-largest economy, prompting a widespread selloff of euro-zone
financial assets. Under intense pressure from the European Union, Spain passed an austerity budget in May, aiming to cut a budget deficit sharply despite an expected slowing in economic growth. It also accelerated efforts to overhaul archaic labor laws that economists say weigh on growth and clean up its ailing mutually owned savings banks. "Spain's government has a firm commitment to its efforts for fiscal consolidation and deficit reduction," Soledad Nunez, head of Spain's Treasury, said in an interview. Moody's said Wednesday it would most likely lower its ratings on Spain by one--at the most two--notches if it decides to take action at the end of its review, which it said would complete within three months. Kathrin Muehlbronner, the agency's lead analyst for Spain, said the country's growth prospects are weaker than those of others at the Aaa level. "In the short term, the government's accelerated fiscal consolidation combined with the higher borrowing costs currently facing the government, consumers, and businesses will likely depress growth," she added. The collapse of a real-estate boom will require several years of adjustment in Spain's economy, including reducing private-sector debt levels and to find new sources of internal economic growth, according to Moody's. It expects Spain's gross-domestic-product growth to average slightly above 1% over the years from 2010 through 2014. In its review, Moody's will look at the government's broader commitment to structural reforms and the likelihood those reforms will be approved, specifically looking at the 2011 budget plan. It will also watch out for costs of recapitalizing Spain's banking sector, which the agency currently believes to be manageable but could affect the outcome of the review it it's larger than expected. Nunez, from the Spanish Treasury, expressed confidence that her government can head off the Moody's downgrade. "Within this three-month review period, the Spanish government can demonstrate that its reform plans will yield results, submitting next year's budget to Parliament, on its labor reform plans, the restructuring of the country's banking system and also through the release of stress tests of the country's banks," Nunez said. -By Joan E. Solsman, Jonathan House and Santiago Perez; Dow Jones Newswires; +34 91 395 8120; djmadrid@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/nae/al?rnd=HMNzpu%2Bdp8NbdRKlGs290w%3D%3D. You can use this link on the day this article is published and the following day. (END) Dow Jones Newswires 06-30-10 1525ET Copyright (c) 2010 Dow Jones & Company, Inc. 15:25 063010