Euro hit by Spanish economy warning

| Thursday December 16, 2010 00:00

Moody's put Spain's rating on review - citing concerns about its mounting debt and its funding needs for next year. Spain has been under scrutiny from international markets since the Irish Republic was forced to take a 85bn euro (£72bn; $113bn) aid package last month. But Madrid denies similarities between the two economies, despite worries over Spain's property and banking sectors. The news pushed the euro down by 0.5 percent against the dollar to $1.3312 while it also fell 0.2 percent against the pound, with one euro worth 0.8462 pence. Spain's government has insisted it will not need to apply for a bail-out from the European Financial Stability Facility (EFSF) - an EU and International Monetary Fund (IMF)-backed rescue scheme. 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. Moody's cut Spain's sovereign debt rating from the top, triple-A rating to Aa1 in September.

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'. 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'. 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 percent, up from 2.37 percent in a similar auction last month.

The rising cost of borrowing reflects investors' concern about the outlook for the Spanish economy and its banking sector in particular. The eurozone has come under increasing scrutiny since Greece needed a 110bn euro 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 yesterday, the Irish Parliament was 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. (BBC)