SPAIN was hit by a double blow Tuesday when Moody’s Investors Service downgraded the country’s government-bond rating, citing fading growth prospects, and the government said housing prices fell further in the third quarter, a concern for embattled banks.

    Moody’s action to cut Spain’s debt by two notches followed Fitch Ratings’ own downgrade of Spanish debt earlier this month, and comes at a time when investors are growing increasingly worried about the health of the euro zone’s financial sector.

    Spain’s housing price index in the July-to-September period fell 5.5 percent from a year earlier, the fastest pace of decline since 2009, and was down 1.3 percent from the second quarter, the public works ministry said.

    Prices peaked in the first quarter of 2008, bringing the country’s decade-long housing boom to an abrupt end and pushing the economy into its worst crisis since the 1970s.

    Signs of stress are mounting for Spain’s ailing banks ahead of this weekend’s summit, where European leaders are expected to draw up measures to shore up the region’s financial system.

    Last week, Standard & Poor’s Ratings Services downgraded Spain’s sovereign-debt rating and the ratings of 10 Spanish banks, citing the depressed property market as a key reason for the move. Then on Tuesday, the agency downgraded the ratings on three Italian banks.

    The public works ministry said housing prices have now dropped 18 percent during the country’s three-year bust, a significant source of strain for the country’s financial sector. The sector already holds more than 400 billion euros (US$552.48 billion) in loans to the construction and real estate sector, equivalent to 40 percent of Spain’s gross domestic product as backed by collateral that loses value as property prices slide.

    Falling prices also are a problem because banks have amassed significant property portfolios, largely from bankrupt developers or foreclosed homes, and because they deter borrowers from seeking new mortgages, a key source of income for the banks.

    The 300 billion euros owed by real estate developers alone are troubling, said Luis Garicano, a professor of economics and strategy at the London School of Economics. “There’s just no chance that these loans will ever be paid back.”

    Meanwhile, Spain was not alone in seeing its bond ratings cut amid the region’s continuing credit crisis. Agencies have cut the ratings of Italy and Belgium.

    Moody’s reduced Spanish debt to A1, which is four steps below the highest possible grade for credit quality. The ratings agency maintained a negative outlook on Spanish debt because of the risk the European crisis could escalate, but removed it from review for a possible downgrade.

    Moody’s said Spain is vulnerable to market stress and its already moderate growth prospects had declined further because of the worsening outlook for global and European growth. (SD-Agencies)