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Spain and the Moody blues

Spanish Prime Minister Mariano Rajoy speaks during a

Spanish Prime Minister Mariano Rajoy speaks during a control session at the Spanish Parliament, in Madrid (June 13, 2012). Credit: AP

I see that the gimlet-eyed bond police at Moody's Investors Service downgraded Spain's debt rating Wednesday night, leaving it just one grade above junk status. This was no doubt the result of some extraordinary sleuthing. I'm guessing that Moody's consulted a web site or two -- perhaps even a newspaper -- before taking this bold step.

In its press release, Moody's says its "decision to leave the government's rating in investment grade reflects the underlying strength of the Spanish economy and the government's clear desire to reverse the debt trajectory through a strong fiscal consolidation programme."

The reality, of course, is that Spain is broke, and investors don't want to lend the country any more money at rates it can afford. So Spain relies on its banks to fund its ongoing deficits. But Spanish banks, battered by a housing bust and increasingly stuffed with Spanish government bonds, are broke too. They're basically on life support from the European Central Bank.

Then there's the "underlying strength of the Spanish economy." What country is Moody's talking about? Spain's economy is a disaster, with unemployment of around 25 percent. "Fiscal consolidation?" Great, more austerity. We already know that won't work. The idea that the debt of a national basket case like Spain still isn't rated as "junk" is only further testament to the shortcomings of bond-rating agencies like Moody's--and the depth of the euro crisis. Stay tuned.