December 15, 2010

Moody’s May Downgrade Credit Rating of Spain

Ratings agency says it does not foresee bailout; Spain hopes for enlargement of temporary loan facility

Moody’s warned Spain on Wednesday that it might be in for a ratings downgrade, bringing that nation unwelcome attention before the start of a summit meeting of European Union (EU) leaders on Thursday.

According to a Reuters report, despite its concern over about 60 billion euros ($80.05 billion) in debt that Madrid will need to refinance early in 2011, the agency sees no expectations that the country will need a bailout. Still, Wednesday saw a rise in the yields on Spain’s 10-year bonds, as well as an increase in the cost of insuring its debt.

Elena Salgado, Spain’s economy minister, said of the increases that market movements were exaggerated due to thin volumes at the end of the year, but added that enlarging the rescue fund set up to handle such concerns might also make sense.

EU leaders will consider a number of measures during their meeting, including the possibility of enlarging the fund. The ongoing debt crisis in Europe has focused the meeting on that and other issues, including the approval of a change in the EU treaty to accommodate German demands related to the establishment of a permanent crisis resolution mechanism to begin in 2013.

Currently the temporary crisis resolution mechanism is a 750-billion-euro loan facility. Didier Reynders, finance minister for Belgium, has said that the EU’s portion of 440 billion euros could possibly be doubled to ward off problems centered on Spain and Portugal; Salgado has agreed that the fund should be enlarged. Pointing out that while the EU’s contribution to the fund is theoretically 440 billion euros, in practice it is somewhat less due to credit guarantees. “What we think is reasonable,” she said, “is that the real capacity of the fund coincide with the theoretical capacity.”

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