Moody's warns of Spain credit downgrade, markets hit

15th December 2010, Comments 0 comments

Rating agency Moody's warned on Wednesday it may downgrade Spain's credit, hammering markets as it cited heavy debt refinancing, banking problems and high-spending regions.

The news came at a bad moment for Spain, battling speculation on world markets that it may slide into a European debt quagmire which has engulfed Greece and Ireland and threatens Portugal.

A rescue for Spain would be far bigger than anything seen to date in Europe: the size of its economy is twice that of Greece, Ireland and Portugal combined.

Moody's Investors Service, which trimmed Spain's sovereign debt rating from top-notch Aaa to Aa1 in September, said it had now put it on review for a further cut.

It said Spain's solvency was not under threat.

And it did not expect the country would need support from a European rescue fund.

"However, Spain's substantial funding requirements, not only for the sovereign but also for the regional governments and the banks, make the country susceptible to further episodes of funding stress," said Moody's lead analyst for Spain, Kathrin Muehbronner.

The euro slid below 1.3300 dollars after striking a high of 1.3382 earlier in the day.

Shares fell across Europe.

Spain's Ibex-35 index fell 1.88 percent in the first hour of trade. London's FTSE 100 index of leading shares dropped 0.49 percent, Frankfurt's DAX 30 slipped 0.63 percent and in Paris the CAC 40 declined 0.92 percent.

The return investors demand before purchasing Spanish debt rose, with the yield on 10-year bonds climbing to 5.604 percent from 5.514 percent the previous close.

"The news has knocked the euro," Jane Foley, a currencies analyst at Rabobank in London, told Dow Jones Newswires.

It played on fears that contagion could extend to the Spanish bond market, she said. But "it doesn't enlighten the market much further with respect to the underlying issues with respect to Spain," she added.

Spain was forced to offer sharply higher returns on a new debt issue on Tuesday, including about two billion euros (2.67 billion dollars) in 12-month bills for which investors demanded return of 3.449 percent compared to 2.363 percent at a similar sale November 16.

Moody's blamed three factors for the credit warning: Spain's vulnerability because of high funding needs next year; the risk that banks may need more money than expected to recapitalise; and concerns over Madrid's ability to control spending by semi-autonomous regions.

These were enough to justify considering a downgrade of Spain's creditworthiness, it said.

"However, Moody's also wants to stress that it continues to view Spain as a much stronger credit than other stressed euro zone countries," Muehbronner said, adding that Spain's rating would most likely remain in the investment grade "Aa" range.

Moody's estimated Spain may have to raise 170 billion euros from the markets next year, despite government hopes to raise up to 15 billion euros by partly privatising the national lottery and airport operator.

In addition, regions needed another 30 billion euros in refinancing for 2011, it said.

And banks had another 90 billion euros of debt to refinance that year.

Spain's task in raising money had been complicated by the fragile confidence of international financial markets, buffeted by fears the country may need help from the European Union and International Monetary Fund.

Debt-stricken Greece got a 110-billion-euro EU-IMF rescue in May when the markets turned against it. Ireland was bailed out similarly earlier this month. Portugal is tipped as the next euro zone casualty on a list including Spain and possibly Italy.

Moody's said it expected Spain to be able to raise the necessary financing but the higher funding costs could limit the availability and raise the price of credit to the wider economy, "which remains vulnerable."

© 2010 AFP

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