Moody's threatens to cut Spain's ratings

Moody's Investors Service on Wednesday threatened to cut Spain's credit ratings, citing its heavy refinancing needs for next year amid a lack of confidence on the part of the markets.

The ratings agency also raised doubts about the country's banks and questioned the regions' ability to do their bit in reining in the public deficit. The agency, however, said the country's solvency was not at risk and doubted whether Spain would have to follow Ireland in seeking help from the European Financial Stability Facility (EFSF).

"Moody's does not believe that Spain's solvency is under threat, and in its base-case assumptions does not expect the Spanish government to have to ask for EFSF liquidity support," Moody's analyst Kathrin Muehlbronner said.

"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," she added.

The agency estimates the central government will need to raise about 170 billion euros next year on top of the proceeds from privatizations, while the regions need to refinance about 30 billion euros.

The country's banks also need to tap 90 billion euros from the markets. Moody's also calculated lenders would need to raise about 25 billion euros to maintain Tier 1 capital ratios of 8 percent, of which the government has already provided 10.5 billion euros. However, "in a more stressed scenario," recapitalization needs could jump by a further 90 billion euros.

Moody's also raised concerns about the "commitment of the regional governments to control their spending and the central government's ability to enforce fiscal discipline at the regional level."

In response, Economy Minister Elena Salgado announced the government was bringing forward plans for the regions to unveil their budget positions on a quarterly basis. She said the regions would announce the state of their books for the third quarter next week. The government initially planned to introduce quarterly reporting next year.

"We believe we can solve all these doubts very soon, the first of which is our ability and that of the regions to meet our deficit commitments," Salgado said. "When we provide these figures, Moody's and everyone else will see there is no risk of the regions not meeting their deficit target [for this year] of 2.4 percent of GDP."

The secretary of state for the economy, José Manuel Campa, criticized Moody's analysis of the region's finances as lacking rigor.

The Moody's report caused the Spanish stock market to fall sharply, while its country risk premium widened to around 260 basis points.

The issues cited by Moody's "have been on the radar screens for quite some time, but nonetheless at this particular juncture it does have the potential to generate more negative impact on market sentiment," Reuters quoted RBS economist Nick Matthews as saying. "There's been a question mark over the need to capitalize the banking sector for quite some time now."