Business

Spain credit rating downgrade threatened by Moody's

  • 15 December 2010
  • From the section Business
Queue at Spanish unemployment office
Image caption Unemployment in Spain stands at close to 20%

Ratings agency Moody's has said it may downgrade Spain's credit rating - warning of problems the country faces in refinancing its debts next year.

Spain has been under financial market scrutiny since the Irish Republic was forced to take an aid package of 85bn euros (£72bn; $113bn) last month.

But Madrid denies similarities between the two economies, despite worries over Spain's property and banking sectors.

EU ministers meet later to discuss how to tackle the crisis better.

And German Chancellor Angela Merkel said that no country in Europe would be "abandoned" - reiterating that the euro would be defended.

'Challenging'

Moody's had already cut Spain's sovereign debt rating from the top, triple-A rating to Aa1 in September.

And in putting the country's rating on review for a further downgrade, it cited concerns about Spain's mounting debt and its funding needs for next year.

The comments sent European markets lower in Wednesday trading. The euro also fell against the dollar and sterling but later regained ground.

The Moody's comments added to fears "that contagion could extend to the Spanish bond market" said Rabobank analyst Jane Foley, though she added the report did "not enlighten the market much further with respect to the underlying issues with respect to Spain".

Spain's government has insisted it will not need to apply for a bail-out from the European Financial Stability Facility (EFSF) - a rescue scheme backed by the EU and International Monetary Fund (IMF).

Moody's agreed that it did not expect Spain to draw on the fund - but added its "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".

It believes that the central government needs to raise about 170bn euros next year with a further 30bn euros for the regions and 90bn for the banks.

This was "rendered more challenging by the fragile confidence of international capital markets," it said.

Its analyst, Kathrin Muehlbronner, added that the "downside risks warrant putting Spain's rating under review" for a further downgrade.

But she added her firm continued to view Spain as "a much stronger credit than other stressed eurozone countries".

Bond impact

The threat of a downgrade was not a huge surprise, said Robert Ryan, a foreign exchange strategist at BNP Paribas in Singapore.

But he added: "This just focuses attention back on Spain".

The yield on Spanish bonds - essentially the interest rate which the government must pay in order to borrow money - increased on Wednesday.

The rising cost of borrowing reflects investors' concern about the outlook for the Spanish economy and its banking sector in particular.

On Tuesday, the Spanish government had to offer investors higher returns in its auction of government debt.

The yield on its 12-month bonds rose to 3.45%, up from 2.37% in a similar auction last month.

And markets will be watching closely another auction of Spanish debt - planned for Thursday.

These will be for longer term bonds which are seen as a greater risk.

The eurozone has come under increasing scrutiny since Greece needed a 110bn-euro bail-out from the EU and IMF in May.

After the Irish Republic's bail-out, Portugal was tipped by many as the next casualty, with questions also raised over Italy's economy, as well as Spain's.

Later on Wednesday, the Irish parliament is due to vote on its bail-out loan.

The decision of Prime Minister Brian Cowen to seek parliamentary approval has delayed the IMF approving its portion of the funds for the Republic.

'Haughtiness'

EU leaders will meet in Brussels on Thursday and Friday for a summit that will address the region's debt crisis and how it can tackle it better - including ways to strengthen the temporary bail-out funds in place.

Mrs Merkel has stressed Berlin's commitment to help its European partners, pledging that: "Nobody in Europe will be abandoned. Europe will succeed together."

But she has been an opponent of some suggested actions, including increasing the eurozone's 750bn euro bail-out fund or creating pan-European bonds to boost confidence in the euro.

However, writing in the Financial Times, two leading German political figures - Social Democrats parliamentary leader Frank-Walter Steinmeier and former finance minister Peer Steinbrueck - said the eurozone needed a "more radical, targeted effort to end the current uncertainty".

These included partially restructuring debts of Greece, the Irish Republic and Portugal, guaranteeing the bonds of stable countries and a limited introduction of pan-European bonds.

European Commission president Jose Manuel Barroso said the onus was on leaders to reach a consensus on action quickly.

However, there has been criticism of some of the EU's key players who are seen as often dominating decision-making.

"I can only warn Germany and France against making a claim to power, which reflects a certain haughtiness and arrogance and disregards the European principle of solidarity," Luxembourg's foreign minister, Jean Asselborn, told Die Welt newspaper.

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