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Spain downgraded

Bbc Business
Saturday, June 09, 2012

SPAINS credit rating has been downgraded as estimates on the size of the bailout it needs begin to mount up.

Fitch cut its rating on Spanish government debt by three notches to BBB, a sign it thinks Spains ability to honour its debts has weakened.

Earlier, there was strong demand for Spanish bonds at an auction on Thursday, seen as a key test of the countrys ability to raise funds.

However, it did have to pay a higher interest rate than before.

The rate on the 10-year Spanish bonds was 6.044 per cent, up from the 5.743 per cent from the last auction in April.

Spain sold $4.87bn in medium and long-term bonds.

The result showed Spain was not locked out of credit markets, although its finance minister said on Tuesday that these were effectively shut to his country.

The higher rate, though, is a sign of weakening confidence in Madrids ability to repay its debts, a view underlined by the Fitch downgrade.

Fitch put Spains creditworthiness at BBB, two notches above junk in its ranking scheme.

It also estimated the countrys banks would need at least $139.2bn or as much as $232bn euros.

An International Monetary Fund (IMF) report due out on Monday is expected to show Spanish banks need at least $92.8bn euros.

It is the first of a number of reports for which the Spanish government is waiting before it decides how to recapitalise its banks.

Ratings agency Standard and Poors earlier said Spains financial system could absorb up to $139.2bn euros of losses on bad loans. But if it needs to find $185bn-$259.9bn, then the banks would need government or EU aid, it said.

German Chancellor Angela Merkel, who held a meeting with UK Prime Minister David Cameron, said the EU stood ready to act. But she has called for Europe to take a gradual path towards political union.

For his part, Mr Cameron urged immediate action, calling for measures to calm nervous markets.

European authorities are said to be working on a way to help Spains troubled banking sector.

UK Chancellor George Osborne said: I know they are working very hard on an imminent solution.

I am optimistic that people are working hard on a solution, and a solution, I think, is coming, he told the BBC.

Borrowing costs had not been as high as feared due to these efforts in Brussels to try to find a way to help Spain, analysts suggested.

In the Spanish bond auction, there was demand for 3.3 times as many 10-year bonds as were available on Thursday.

The yield on Spanish 10-year bonds from previous auctions, known as the secondary market, fell below 6.1 per cent in trading on Thursday, having recently risen above 6.7 per cent.

Although the yield on the 10-year is just a tad below secondary market levels, these are prohibitive rates which underscore the dramatic deterioration in Spains perceived creditworthiness, said Nicholas Spiro of Spiro Sovereign Strategy.

If it wasnt for its banks continued support at auctions, Spain would be unable to sell its debt.

Spain is keen to avoid a full international bailout, which would be politically damaging and come with strict economic conditions.