The escalating debt crisis in the eurozone has come under sharp focus once again as a key agency warned it may downgrade Spain’s credit rating.
The country’s mounting debt, financing needs and a lack of faith in its government’s ability to tackle the issues prompted Moody’s Investors Service to place the Aa1 rating – only just downgraded from AAA in September – on review.
The euro fell against most major currencies amid fears that Spain will be forced to follow in the footsteps of Greece and Ireland and accept a multibillion-pound bailout from the European Union and International Monetary Fund.
But despite problems in the property and banking sectors, the Spanish government has denied it will need any financial assistance.
Economists, most recently including deputy governor at the Bank of England Charles Bean, have raised concerns over the threats sovereign-debt woes in Europe pose to the UK economy.
A weakened eurozone could hit the UK’s export trade – seen as key to a healthy economic recovery.
Moody’s report spooked the London stock market, with the banking sector leading the FTSE 100 Index lower. Barclays, which is seen as being one of the most exposed to Spain’s economy, fell 3% at the top of the fallers’ board.
Spain is struggling to emerge from nearly two years of recession and has the highest unemployment rate in the eurozone and a swollen budget deficit. The Spanish government will need to raise around 170 billion euros (£143 billion) in 2011, while Spanish banks have about 90 billion euros (£76 billion) worth of debt to refinance, Moody’s said.
Kathrin Muehlbronner, lead analyst for Spain at Moody’s, said the country was vulnerable but did not expect its government to ask for a bail-out. Ms Muehlbronner said: “Moody’s wants to stress that it continues to view Spain as a much stronger credit than other stressed eurozone countries.”
But she added: “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.”