Moody’s likely to downgrade Spain's rating

Moody's Investor Services said on Wednesday that it has put Spain's Aa1 debt rating under review for a possible downgrade taking into account the large debt burden of the country and its funding needs next year.

Spain, the fourth-largest economy in the euro zone, will need 170 billion euros ($228 billion) next year.

“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 Kathrin Muehlbronner, an analyst at Moody’s.

The rating agency also cited concerns over the the central government's control of local authorities in achieving structural improvements in Spain's general finances.

Spain’s regional refinancing needs total 30 billion euros ($40.3 billion) next year while banks would need around 90 billion euros ($121 billion).

Moody's believes that the above-mentioned downside risks warrant putting Spain's rating under review for downgrade, said Muehlbronner.

In September, Moody’s lowered Spain’s top rating from Aa1 from Aaa as the country struggled to contain the debt crisis. Spain initiated various measures to contain its debt, such as increasing taxes, cutting wages, and privatizing state industries.

Budget deficit of Spain, which accounted for 11 percent of country gross domestic product in 2009, was the third-biggest in the euro region. Spain's unemployment rate of more than 20 percent is the highest in Europe.

However, Moody's also wants to stress that it continues to view Spain as a much stronger credit than other stressed euro zone countries. This is reflected in the significantly higher rating for the Spanish sovereign. Moody's review will therefore most likely conclude that Spain's rating will remain in the Aa range, Muehlbronner added.

Similarly, Fitch Ratings lowered Spain’s top rating to AA+ in May while Standard & Poor’s downgraded Spain to AA in January 2009.