Spain saw its sovereign debt rating slashed by one notch to Aa2

Spain saw its sovereign debt rating slashed by one notch to Aa2 on Thursday, as Moody’s, the credit rating agency, cited higher than expected recapitalization costs for the country’s savings banks or cajas, and the central government’s inability to enforce ambitious budget deficit targets, set at 1.3% of GDP throughout the 19 autonomous communities.  Spanish officials were enraged, starting with finance Minister Elena Salgado, who disagreed with Moody’s decision to release the figures hours ahead of the Bank of Spain’s official estimates of restructuring costs.

The country’s benchmark index, the IBEX 35, dropped 1.17% through the session, while Spanish government bond spreads over German bunds hit 225 basis points, as yields rose to 5.53%.

Moody’s downgraded its rating on Spanish government bonds to the second highest notch on fears that the the cost of re capitalizing the country’s many cajas would probably reach €40 to €50 billion (about $55 to $69 billion).  That would be far more than the €20 billion ($28 billion)estimated by the office of President Jose Luis Rodriguez Zapatero and would substantially increase Spain’s public debt ratio.

Spanish officials were infuriated that Moody’s chose to release these numbers only hours ahead of the Bank of Spain’s official estimates, which put banks and cajas’ recapitalization needs at €15.2 billion (about $20.1 billion).  The Iberian country’s central bank announced that 12 institutions, which included 8 cajas, two banks, and two foreign subsidiaries of Deutsche Bank and Barclays, would require funding.  The credit rating agency noted that in “a more stressed scenario, recapitalization needs could increase to approximately €110 – €120 billion” ($152 to $165 billion).

While Spanish media sought to discredit Moody’s and its fellow rating agencies, Standard & Poor’s and Fitch, the company’s London office also raised the question of whether the central government’s had the capacity to enforce an unprecedented budget deficit target of 1.3% of GDP.  Praising Zapatero’s government’s resolve in reining in the deficit in 2010, where the budget deficit target was set at 2.4% of GDP, Moody’s noted that 9 of the 17 autonomous communities weren’t able to comply.  Moreover,