Warning about Spain sparks fresh concerns over future of euro

A WARNING that Spain’s credit rating may be cut resulted in a fresh rush of concern about the euro yesterday on the eve of a meeting of EU leaders determined to keep markets calm.

In an ironic twist to the ongoing fears of contagion from Greece and Ireland that saw them being bailed out by the EU/IMF, figures released for 2009 show Ireland remained one of the wealthiest countries in the union.

Last year, for the first time in almost a decade, it fell from second to third place, behind Luxembourg and the Netherlands.

Despite GDP per inhabitant falling from 44% of the EU average to 27%, the country was just three percentage points behind the Dutch.

Moody’s threatened to cut Spain’s credit rating from Aa1 ahead of today’s planned bond sale. While Spain has to raise €170 billion next year to fund its regions and banks, Moody’s says it believes a bailout is “unlikely”.

However, the move was seen as making a bailout situation more likely.

David Buick, market strategist at BGC Partners in London, said: “We’ve just had a huge boulder thrown into the water sending waves of uncertainty through the market.

“Spain is an enormous country,” he added, since its economy, the euro area’s fourth largest, is more than double that of Greece, Ireland and Portugal combined.

He predicted that markets will regain yesterday’s losses — 0.4% in the Stoxx Europe 600 Index while national benchmark indexes fell in 10 of the 18 western European markets including Spain, Germany, France and Britain.

Moody’s warned that Spain’s debt may increase because of the cost of recapitalising its banking industry. “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 Moody’s analyst Kathrin Muehlbronner.

Borrowing costs for Spain and Portugal rose on the warning. Just last week Spain succeeded in convincing fellow eurozone finance ministers that the new austerity measures it had introduced took it out of the danger zone.

As a result they agreed to decouple the country from Portugal. Many expect Portugal will apply for an EU/IMF loan in the coming weeks as it faces raising considerable sums on the open market next year to roll over debt.

Eurozone ministers are hoping that Spain will not find itself in a similar position since the way the European Financial Stability Facility (EFSF) is set up means it will not be able to access the full €440bn available to it, and so may have difficulty bailing out Spain.

The issue of creating a replacement fund for the EFSF in 2013 is expected to be discussed by EU leaders at their two-day summit that begins today in Brussels. However, many want to avoid discussing alternatives such as eurobonds — but they may be forced to consider the variations on this funding mechanism if Spain appears to be in difficulties.

Chairperson of the eurozone finance ministers, Luxembourg prime minister Jean-Claude Juncker, has said he will raise the bond idea if the opportunity arises but added that he believed that no decision could be taken on it at this time.

But German chancellor Angela Merkel said that ‘e-bonds’ were not the solution, while at the same time trying to bolster the euro by insisting that “No one in Europe will be left alone, no one in Europe will be abandoned.”

Writing in yesterday’s Financial Times, her former Social Democrat coalition partners and former finance minister Peer Steinbrueck and former foreign minister Frank-Walter Steinmeier said that eurobonds would “send the message that Europe is strong and united”.

The question of pumping more money into the EFSF has also been raised and pushed to one side by most member states over the past few weeks. In the current circumstances it could also be discussed at the summit.

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