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Moody’s sets sights on Spain and Portugal

Rating agency Moody’s took aim at Spain and Portugal Tuesday in the latest warning that Europe faces a grim task if it is to contain a damaging debt and deficit crisis threatening the whole euro project.

Following the bailout of Greece and Ireland, the agency said it had downgraded its credit rating on two of Spain’s 17 regional governments, Castille-La Manche and Murcia, a week after warning it may lower the Spanish central government’s Aa1 rating.

At the same time it warned it could lower by one or two notches Portugal’s A1 rating owing to uncertainty about growth and borrowing prospects, although it said it expected Lisbon to be able to pay its debts.

The Greek and Irish bailouts have focused attention on the weak state of public finance in the 16 nations that share the euro, particularly so-called peripheral countries such as Portugal and Spain whose economies are struggling.

Nervous investors have driven up the rates Spain and Portugal must pay to borrow funds to finance their debts.

Spain on Tuesday sold 3.876 billion euros (5.096 billion dollars) of three-month and six-month bonds in its final bond auction of the year but it had to pay higher rates than the last time the securities were issued last month.

The prospect of a bailout for Spain is especially troubling for financial markets since it would be far bigger than anything seen to date in Europe because the size of its economy is twice that of Greece, Ireland and Portugal combined.

Finance Minister Elena Salgado said that despite rising yields at recent debt auctions, the average yield on Spanish debt was 3.6 percent and the country would have no problem issuing debt in 2011.

“We are not going to have any financing problems next year,” she said during an interview Tuesday with Spanish television.

Spain’s central government deficit, which does not include regional government spending, fell to 3.68 percent of gross domestic product at the end of November, compared to 6.7 percent for all of last year, the government said Tuesday, as tax hikes and government cutbacks took effect.

But financial markets have increasingly turned their attention to the financial situation in Spain’s 17 regional governments, which have considerable autonomy, including the right to issue bonds to finance their expenses.

Moody’s lowered its long-term rating for Murcia to Aa3 from Aa2 and it cut its rating for Castille-La Manche to A1 from Aa3.

The two are the only regional governments with public deficits above 2.0 percent of gross domestic product.

Salgado said Monday that Spain’s 17 regional governments had a combined public deficit during the first nine-months of the year of 1.24 percent of GDP, a figure which is “perfectly compatible” with the year-end target for regional government debt of 2.4 percent.

European leaders have struggled to reassure markets about the stability of the euro.

They agreed at a Brussels summit last week to establish a permanent financial bailout mechanism from mid-2013 to come to the aid of troubled eurozone governments.

But the absence of details on its size and its operation left markets disappointed and did little to assure them that EU governments have the capacity to act decisively.

While Moody’s placed Portugal on watch for a ratings downgrade, it stressed that it believed Lisbon would be able to make its debt payments and avoid a bailout.

“In Moody’s opinion, Portugal’s solvency is not in question,” Anthony Thomas, Moody’s Vice President and lead analyst for Portugal was quoted as saying in a statement.

“But the likely deterioration in debt affordability over the medium term and ongoing concerns about the economy’s ability to withstand fiscal consolidation and private sector deleveraging mean its outlook may no longer be consistent with an A1 rating,” he added.