Moody's rating agency threatened Wednesday to downgrade Spain's credit rating, hammering markets as it warned of a 170-billion-Euro refinancing challenge ahead in 2011.
The news came just hours after the Spanish parliament passed more austerity measures and when the government of President Rodriguez Zapatero is 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.
Spain's Ibex-35 index slumped 1.50 percent by the close. London's FTSE 100 index of leading shares dropped 0.15 percent, Frankfurt's DAX fell 0.16 percent, and in Paris the CAC 40 declined 0.58 percent.
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.
However, Moody's also wants to stress that it continues to view Spain as a much stronger credit risk than other stressed Euro zone countries, Muehbronner said, adding that Spain's rating would most likely remain in the investment grade Aa range.
Moody's estimated Spain may have to raise 170 billion Euros from the markets next year, despite government hopes to raise up to 15 billion Euros by partly privatising the national lottery and airport operator. In addition, Spanish regions needed another 30 billion Euros in refinancing in 2011, it said. And banks had another 90 billion Euros of debt to refinance that year.
A few hours after the Moody's blow, rival agency Fitch Ratings trimmed the credit ratings of the Spanish savings bank federation CECA, citing concerns over liquidity pressure in the sector.
CECA, which provide key financial services to the savings banks and acts as their representative, had its long-term rating and short-term rating cut by one notch. The long-term rating also had a negative outlook