Moody's: Spain's credit rating could be cut to junk within three months

By Emma Rowley, and Emily Gosden

10:50PM BST 13 Jun 2012

http://www.telegraph.co.uk/finance/financialcrisis/9329614/Moodys-Spains-credit-rating-could-be-cut-to-junk-within-three-months.html

The €100bn (£80bn) bank bailout agreed this week will “further increase the country’s debt burden”, the agency said, as it cut Spain’s government bond rating from A3 to Baa3 – one notch above non-investment grade or 'junk’ status.

Moody’s also cited the Spanish government’s “very limited financial market access” and the weakness of the country’s economy.

It placed Spain on review for possible further downgrade as it awaited the outcome of audits of Spanish banks and further details of the bank bailout. Spain’s rating could also be cut if “the risk of a Greek exit from the euro were to rise further”, Moody’s said. It expected to conclude the review within a maximum of three months.

The downgrade came after Spain’s prime minister said he was battling to get the eurozone’s central bankers to bring down the country’s record borrowing costs – and amid predictions that the state will need a second bail-out.

Mariano Rajoy urged the European Central Bank (ECB) to resume its massive purchases of struggling euro nations’ debt in order to lower their borrowing costs. The programme has been suspended for months. “That is the battle we have to wage in Europe,” he told the Spanish parliament. “I am waging it.”

Mr Rajoy also published a letter to EU leaders calling for action from the ECB, which is forbidden by treaty to take instructions from politicians.

“Businesses and households need access to liquidity. That is impossible if doubts persist over the sustainability of the debt of sovereign states,” he wrote to Herman van Rompuy, the EU president, and José Manuel Barroso, chief of the European Commission. Mr Rajoy said: “Today, the only institution we have with the capacity to assure the required conditions of stability and liquidity is the European Central Bank.”

Spanish yields, or implied interest rates, on its bonds this week reached euro-era highs, as investors shunned the debt after the weekend announcement that the country had asked for a €100bn (£80bn) bail-out to rescue its banks.

Intended to shore up confidence in Spain, the move has stoked worries about the government’s ability to finance itself, since it required outside help.

Spain will soon follow Portugal, Ireland and Greece in seeking a sovereign bail-out, according to a majority of economists polled by Reuters. Of the 59 analysts canvassed, 35 said it was likely or very likely Spain will do so in the next 12 months.

Yields on Spanish 10-year debt were on Wednesday trading over 6.7pc, close to Tuesday’s record highs. Anything past 6pc is seen as unsustainable.

Italian borrowing costs have also risen as investors lose faith in its position, with yields on its 10-year debt trading over 6.2pc.

Rome had to pay interest rates of almost 4pc - up from 2.3pc in a similar auction last month - to borrow €6.5bn for a year from the debt markets.

German finance minister Wolfgang Schaeuble said Italy was safe it it sticks to its path of austerity and reforms. But Mario Monti, Italy’s technocrat leader, warned Europe is at a “crucial” moment.