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Moody’s warns of downgrade over Spain debt woes

Moody’s rating agency threatened Wednesday to downgrade Spain’s credit rating, hammering markets as it warned of a 170-billion-euro refinancing challenge ahead in 2011.

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.

Spain’s finance minister vowed to try to persuade the agency to abandon any downgrade, which would further complicate its efforts to raise money on the markets.

“I hope that within three months we can give sufficient arguments so that this negative outlook changes to positive,” Finance Minister Elena Salgado told reporters.

The euro skidded to 1.3334 dollars, up slightly after a brief dip below 1.33 but still below New York’s close of 1.3375.

Shares fell across Europe.

Spain’s Ibex-35 index slumped 2.00 percent by early afternoon. London’s FTSE 100 index of leading shares dropped 0.40 percent, Frankfurt’s DAX 30 slipped 0.77 percent and in Paris the CAC 40 declined 0.79 percent.

The return that investors demand to purchase Spanish debt edged up only slightly, with the yield on 10-year bonds climbing to 5.539 percent from 5.514 percent the previous close.

Spain had already been forced to offer sharply higher returns on a new debt issue on Tuesday when it raised 2.5 billion euros via an issue of 12-month and 18-month bonds.

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 risk 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, Spanish regions needed another 30 billion euros in refinancing in 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.

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.”