By Colin Barr
March 10, 2011

It’s no surprise markets are going wobbly. Moody’s is telling us we have seen the movie now playing in Spain, and it doesn’t end well.

Moody’s downgraded Spain’s credit rating by a notch while keeping its outlook negative, meaning another downgrade could come soon. The rating agency warns the cost of bank restructuring could exceed the government’s estimates.

This is a familiar theme but not a very reassuring one. Moody’s and its rival S&P made similar comments over and over again last summer about Ireland. And though the rating agencies have gotten a lot wrong in recent years, they nailed this call.

The Irish government spent much of last year insisting it had its banking problems under control, but ended up having to ask for a bailout from the European Union and the International Monetary Fund, largely for the sake of recapitalizing the banks again. Irish taxpayers, unhappy with this result, threw the government out on its ear, but the bills still have to be paid.

Spain’s banking problems are, by all accounts, not quite as acute as Ireland’s, where you had a nice helping of fraud to go with that giant property bubble.

But the Spanish government’s estimate that it can get the matter in hand by spending 20 billion euros ($27.6 billion) is looking more and more like wishful thinking.  European bank stocks tumbled, led by Spanish giants Banco Bilbao (bbva) and Santander (std), each off 3% or more.

Moody’s said it believes recapitalization of the savings banks known as cajas will cost at least twice as much, say 40 billion to 50 billion euros. And it says that should the global economic recovery take a detour into slumpville, the costs could double even that estimate, at 110 billion to 120 billion euros.

That is about 10% of Spanish gross domestic product, which is a large tab indeed — though less than a third of what Ireland is on track to pay.

But even that tab would be dwarfed by the bill that might come due if Moody’s ends up downgrading Spain again – something it warns might become necessary if bank recapitalization costs keep rising and push the country into a European bailout.

The ratings could also face further downward pressure if the recapitalisation needs for the banking sector increase further beyond Moody’s current expectations, as this would result in a further rise in government debt and increasing pressure on debt affordability. A need to access the EFSF, although unlikely in Moody’s view, would probably lead to a downgrade to below the Aa range.

And who knows what exciting things might happen then.

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