Moody's rating agency said today that it could cut Spain's credit rating again because of the country's heavy refinancing schedule and problems in meeting its borrowing needs next year.
Moody's cut Spain's sovereign debt rating from Aaa to Aa1 in September and said today that it could now further reduce the rating.
It said that Spain's solvency was not in question and it would not need external help, but its heavy financing requirements would likely create fresh tensions on the money markets.
It also cited the possibility that higher costs to recapitalise the banking system could increase the public debt and noted concerns over whether the central government can push through reforms given the high degree of autonomy enjoyed by the regions.
'Moody's believes that the downside risks warrant putting Spain's rating under review for downgrade,' top Spain analyst Kathrin Muehlbronner said.
'However, Moody's also wants to stress that it continues to view Spain as a much stronger credit than other stressed Euro zone countries. Moody's review will, therefore, most likely conclude that Spain's rating will remain in the Aa range,' it added.
Moody's estimated that the Spanish government needs to raise some €170 billion in 2011, with the regions needing another €30 billion and the banks €90 billion.
Raising this money is 'now rendered more challenging by the fragile confidence of international capital markets,' it said, noting recent speculation that Spain might have to seek help from the European Union and International Monetary Fund
Debt-stricken Greece got a €110 billion EU-IMF rescue in May when the markets turned against it, meaning it could no longer raise fresh funds at sustainable rates and was faced with the prospect of default.
Ireland was bailed out similarly earlier this month, with Portugal tipped as the next euro zone casualty on a list including Spain and possibly Italy as the euro zone debt and deficit crisis spreads.
Moody's said it expected Spain to be 'able to raise the necessary financing'.
'However, ongoing higher funding costs would strain Spain's debt affordability further beyond current expectations and could also negatively impact the availability and cost of credit to the wider economy, which remains vulnerable,' the rating agency said.
Moody's said its review of Spain's rating 'will focus on the central government's ongoing commitment to address the key structural challenges of the Spanish economy.'
At the same time, it will keep in focus 'any broader developments in the Euro zone, in particular with regard to the design of the envisaged permanent crisis mechanism.'
EU leaders hold a key summit meeting tomorrow and Friday when proposals for such a permanent rescue mechanism will top the agenda. After the Greek bailout in May, the EU and IMF put together a three-year €750 billion package but opinions on how a successor programme should work are sharply divided.
