Moody’s rating agency threatened yesterday to downgrade Spain’s credit rating, hammering markets as it warned of a €170-billion- 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.
But it said Spain’s solvency was not under threat, and that 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 $1.3314 in evening trade, up slightly after a brief dip below 1.33 but still below the late New York quote of 1.3375.
Shares fell across Europe.
Spain’s Ibex-35 index slumped 1.50 per cent by the close. London’s FTSE 100 index of leading shares dropped 0.15 per cent, Frankfurt’s DAX fell 0.16 per cent, and in Paris the CAC 40 declined 0.58 per cent.
But despite the downgrade warning, the return that investors demand to purchase Spanish debt fell, with the yield on 10-year bonds dropping to 5.449 per cent from 5.514 per cent on Tuesday.
Spain had been forced to offer sharply higher returns on a new debt issue on Tuesday when it raised €2.5 billion 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.