Moody's Investors Service (NYSE: MCO) yesterday (Wednesday) said it might downgrade Spain's debt rating due to concerns about high borrowing costs, the poor financial state of its banks, and the country's regional debt.
The ratings firm said the country's vulnerability to refinancing needs in 2011 is triggering weak market confidence.
"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 analyst Kathrin Muehlbronner.
The country currently has an Aa1 rating from Moody's, which was cut from Aaa in September. The news came a day before a planned bond sale of up to 3 billion euros ($4.01 billion), and at a time when Spain needed to bolster investor confidence in its ability to fix its financial woes.
"The news is another negative for Spain, and only makes tomorrow's Spanish bond auctions even more tricky," Niels From, chief analyst at Nordea Bank AB in Copenhagen, told Bloomberg. "Spain is already struggling to convince market participants that the country can put its own house in order itself."
Spain on Tuesday sold $3.3 billion (2.5 billion euros) in treasury bills with yields for 12-month and 18-month bills more than a percentage point higher than a month ago. Speculation on Spain's debt situation pushed the yield demanded on Spain's 10-year bonds over German bunds to a high of 283 basis points on Nov. 30.
Now the question is whether or not the Moody's downgrade will be a precursor to Spain dipping into the Eurozone bailout fund like Greece and Ireland. The Irish Parliament on Wednesday voted 81-75 to accept a $113 billion (85 billion euros) rescue package from the European Union (EU) and International Monetary Fund (IMF).
Moody's analysts said that although there are concerns over Spain meeting its financial obligations, the ratings agency considers the country to be in better shape than some of its neighbors.
"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. "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."
Spanish Prime Minister Jose Luis Rodriguez Zapatero has implemented aggressive austerity measures to try and avoid the bailout path of other debt-plagued Eurozone countries through tax hikes and spending cuts for this year and next.
But analysts aren't so confident that the country has done enough to prevent a future bailout.
To keep itself afloat Spain has to raise $227.48 billion (170 billion euros) next year, with regional governments needing to refinance $40 billion (30 billion euros) and Spanish banks about $120.2 billion (90 billion euros). Some analysts think with these numbers, it could be too late for Spain to successfully crawl out of debt.
"The Moody's warning is another blow for Spain and the Eurozone," David Own, chief European financial economist at Jefferies Group Inc. (NYSE: JEF), told the Financial Times. "The worry is that the country's cost of funding will keep on rising to a level where it cannot be sustained. In such a scenario, Madrid will need emergency loans, which will take the Eurozone crisis to a new and dangerous level."
Despite its efforts to control debt, if Spain can't maintain investor confidence, bond yields will continue to rise and debt obligations will surge past unmanageable levels.
"The market is losing confidence in Spain and the periphery because the [European Central Bank] ECB seems unwilling to buy Spanish bonds and there is very little faith that anything will be done in Brussels at this week's [European Union] summit to change the situation," Elisabeth Afseth, a fixed-income strategist at Evolution Securities, told the FT.
European officials will meet in Brussels today (Thursday) and Friday and could outline a permanent bailout fund to take effect after the EFSF expires in 2013.
News and Related Story Links:
- Money Morning News Archive:
Spain Stories - The Wall Street Journal:
Moody's Threatens Spain Downgrade - Bloomberg:
Spain's Aa1 Debt Rating Put on Reiew by Moody's - Money Morning:
More Investors Betting Ireland Will Go the Way of Greece - Money Morning:
Four Ways to Sidestep Ireland's Woes and Profit from the EU's Economic Muscle - Financial Times:
Risk of Spanish downgrade heightens - Financial Times:
No easy exit from vicious Spanish debt circle