(FT) -- Moody's, the credit ratings agency, has said it may downgrade Spanish government bonds because of the country's likely difficulty in raising large sums of money next year, the problems of its savings banks and the debts incurred by its autonomous regions.
Spain was downgraded by Moody's from the agency's top rating of triple A by one notch less than three months ago because of weak economic growth, the difficulty of cutting the budget deficit and higher borrowing needs.
In a statement on Wednesday, Moody's said it was putting Spain's current Aa1 ratings for local and foreign currency government bonds on review for possible downgrade, and was also reviewing the rating of the Fund for Orderly Bank Restructuring, known as the Frob from its Spanish initials.
The markets reacted swiftly to the news. The euro fell 0.5 per cent against the dollar to $1.3319 and yields on Spanish 10-year bonds challenged euro-era highs with an 8 basis point jump to 5.6 per cent.
Madrid's Ibex 35 stock index fell 1.4 per cent and the broader FTSE Eurofirst 300 lost 0.3 per cent as the region's banks came under pressure because of their exposure to eurozone sovereign debt.
The announcement by Moody's comes at a bad time for Spain, one day ahead of its last scheduled bond auction of the year and just as it is struggling to restore international confidence in its economy and its banking system. On Tuesday, Spain sold €2.5bn in treasury bills but had to pay more than one percentage point more in interest than it did only a month ago.
Sepatately, Portugal had to pay extremely high premiums to sell short-term debt in a further sign of the problems in the eurozone debt markets. Lisbon borrowed €500m of three-month bills, paying an average yield of 3.40 per cent compared with a yield of 1.82 per cent at the previous auction on November 3. The auction attracted bids of 1.9 times the amount offered compared with a bid to cover ratio of 2.2 in November.
On Spain, Moody's said the first reason for the review was the country's "vulnerability to funding stress", a problem amplified by "fragile market confidence". That underlined how Spain risks falling victim to a vicious circle of credit downgrades leading to market nerves that lead in turn to further downgrades and higher borrowing costs.
"However, Moody's also wants to stress that it continues to view Spain as a much stronger credit than other stressed eurozone countries," the agency said, predicting that the Spanish rating would not be substantially reduced.
"Moody's does not believe that Spain's solvency is under threat, and its base case assumption does not expect the Spanish government to have to ask for EFSF [European Financial Stability Facility] liquidity support," it said.
Barclay's Capital estimates that Spain's gross issuance will amount to €77bn in 2011, down from €95bn in 2010. The decline in the need for new bond sales is partly down to a rise in privatisations.
Moody's said the central government would need to raise €170bn next year, including treasury-bill rollovers, while regional governments needed to refinance €30bn and banks around €90bn.
In addition, Moody's expressed concern about the capital needs of the country's cajas, or savings banks, saying they would need between €25bn and €80bn of extra capital if they were to retain tier one capital ratios of 8 per cent.
Moody's also doubted whether the Spanish government would be able to engineer necessary structural improvements in public finances over the next few years, given the fiscal indiscipline of some of the 17 regional governments.
Elisabeth Afseth, fixed-income strategist at Evolution Securities, said: "The danger is that investors will lose confidence in Spain, which could lead its bond markets to come under serious pressure".
Pressure on the Spanish bond markets might also force the European Central Bank to start buying Spanish government bonds as part of its debt purchase programme.
So far, the ECB has bought about €70bn in government bonds, but it has restricted its purchases to the bonds of Greece, Ireland and Portugal. CNN
