Moody's Investors Service cut Spain's top credit rating by one level to Aa1 from Aaa with a stable outlook. Moody's, whose downgrade follows earlier downgrades by Fitch Ratings and Standard & Poor's, cited a "weak" economic outlook and doubts that the nation will reach deficit-reduction targets, Bloomberg reported.
Moody's sees Spanish growth of about 1% per year on average over the next few years, the agency said. That's less than the growth it expects for the U.K. or Germany, and less than the Spanish government's own projections for growth of 1.3% next year, 2.5% in 2012 and 2.7% in 2013.
Spain has started to implement austerity measures, which are beginning to pay off, according to the government. The central government's budget deficit narrowed by almost half to 3.3% of GDP in the first eight months of the year. But Moody's expects the efforts to be slower than government estimates.
Meanwhile, Ireland disclosed Thursday a "horrendous" price tag -- as Finance Minister Brian Lenihan put it -- of nearly €40 billion ($54.33 billion) for bailing out its distressed banks and said it would have to make more drastic budget savings.
Reuters reported that Ireland's central bank estimated the worst-case cost of winding down nationalized Anglo Irish Bank at €34 billion.
While the euro fell vis-a-vis the dollar, overall, financial markets reacted calmly and bonds rallied as some investors anticipated a two-grade cut for Spain's debt, while traders said a bill of up to €35 billion for Anglo Irish had been priced in.