News Column

Markets Pressure Spain Following Moody's Downgrade

June 26, 2012

Financial markets on Tuesday stepped up pressure on Spain after ratings agency Moody's downgraded its position on the long-term debt and deposit ratings for 28 Spanish banks.

Spain sold $3.85 billion of government bonds at rising interest rates. Three-month bonds fetched a yield of 2.5 percent, thrice as high as in the previous auction in May, while the yield for six-month bonds nearly doubled to 3.4 percent.

Spanish banks suffered losses on the Madrid stock exchange. The yield for Spanish 10-year bonds went up to 6.69 from 6.61 percent, with the risk premium measuring the difference between German and Spanish bonds rose slightly to 518 basis points.

Moody's overnight downgraded 28 Spanish banks by one to four notches, some of them to speculative level, citing Spain's reduced creditworthiness and the banks' exposure to a real estate crash.

The downgrade came just hours after Spain had applied for a eurozone rescue for its banks. The eurozone has pledged up to 100 billion euros, though independent auditors put the need at a maximum of 62 billion euros.

Markets were maintaining "exaggerated" pressure on Spanish debt and on its banks, European Competition Commissioner Joaquin Almunia said in the northern city of Santander. He expressed confidence that the situation would calm down once the details of the bank rescue became known.

Banks receiving aid will have to present restructuring plans and may need to shed problematic assets, Economy Minister Luis de Guindos said. The government has already ordered banks to place toxic real estate assets in liquidation societies.

De Guindos said the eurozone would only set conditions for banks, though the European authorities will also continue "supervising" Spain's economic and fiscal policy, aimed at trimming the 8.9-percent budget deficit.

Eurozone leaders will pressure Spain to: raise value-added tax; raise retirement age earlier than planned; and cede to Brussels some of the powers of the Bank of Spain and of the stock market watchdog CNMV, the daily El Pais reported.

Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH

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