Moody's Upgrades Spain's Bond Rating

Moody's Investors Service on Friday raised Spain's government bond rating one notch to Baa2, citing a more sustainable growth model and structural reforms in the country's labor market and pension system.

The agency assigned a "positive" outlook to the rating just a few months after raising it to "stable" from "negative." At that time in December, Moody's kept Spain's government bond at Baa3, which is the lowest investment-grade rating.

Moody's has brightened its forecast for several euro-zone countries in recent months as the region slowly crawls out of its longest recession of the postwar era. In the past few months, Moody's has raised its outlook on Italy and Portugal, and raised its rating on Ireland.

In Friday's decision, the ratings agency said the upgrade largely reflected a "rebalancing of the Spanish economy towards a more sustainable growth model, which is being underpinned by structural improvements in the country's external competitiveness, and the ongoing deleveraging in the domestic economy."

The reforms now support an expectation of stronger growth over the medium term and an improvement in the resilience of the government's finances, the ratings agency added.

Even so, Moody's said Spain remains constrained by significant budget deficit--around 7% of gross domestic product--and a high debt-to-GDP ratio. Moody's expects that ratio to peak in 2016. The Spanish economy is also still confronted with a relatively weak banking system, Moody's said.

Spain spent over a year on the brink of junk-bond status, with Friday's move marking a sharp turnaround in the country's outlook. In November, both Standard & Poor's and Fitch Ratings Service raised their outlook on Spain, but neither has raised the rating. S&P has a rating on Spain of one notch above junk-bond status at triple-A-minus, while Fitch has Spain at BBB, two notches above junk.

Markets didn't react to the announcement. The euro was unchanged at $1.3734, while yields on 10-year Spanish government bonds held steady at 3.557%.