Moody's Delays Spanish Debt Rating Review Following Budget, Bank Audit

Moody's Investors Service has delayed its review into Spain's investment grade debt rating following last weeks bank audit and budget statement, the ratings firm said Tuesday.

Moody's says it needs to study several relevant factors in its review of the Baa3 assessment, which sits at the last rung of the investment grade ladder, including Spain's bank captial needs, the measures taken in Prime Minister Mariano Rajoy's 2013 budget statement and the size of support mechanisms in place from Spain's European Union partners. It expects to make a final decision in October.

"Moody's review of Spain's rating is continuing to assess a number of factors, including Spanish banks' capital needs, the nature and size of support mechanisms, the recently released 2013 budget plan and the consequences for the euro area's crisis management framework of the further advancement of a banking union," a Moody's spokesperson told Reuters.

Economy Minister Luis de Guindos told a news conference in Madrid Monday that he and Prime Minister Rajoy were looking closely at the terms and conditions linked to the ECB's programme of unlimited bond purchases just days after its controversial budget statement and bank audit results, which some analysts suggest could pave the way for a bailout worth as much as €100bn.

EU Economic and Monetary Affairs Commissioner Olli Rehn said Monday his office will give a formal reply to the Spanish budget plans in November, but praised the reforms laid out by Rajoy and de Guindos and said he was confident the pair would take the necessary steps to restore health to Europe's fourth-largest economy.

Some analysts suspect Spain may opt for what's known as an Enhanced Conditions Credit Line, an EU aid package that does not involve explicit ECB bond purchases. Under certain conditions, Spain could arrange one-year loans from is single currency partners for as much as €100bn.

"(An) ECCL, while less embarrassing for the Spanish government and more digestible for the German Bundestag, may be viewed as too small," wrote Societe Generale economist Michala Marcussen.

"The challenge for Spain is to bring back fundamental foreign investors. Wining back their confidence is likely to prove a slow process leaving markets vulnerable to the more 'opportunistic' trades that appear to dominate at present."

Without the implicit or explicit backstop of the ECB, Spanish yields could rise sharply if Madrid can't engender the kind of investor confidence it will need to plug its 2013 fiscal gap; Spain needs to borrow around €207bn next year, and around half of that will come from the bond markets. The increased borrowing costs will then pile more pressure on the central and regional governments to cut public spending even further.

Spain published details of its long-awaited private auditing of the banking sector late Friday, with consultants Oliver Wyman and Roland Berger reporting a total capital need of around €59.3bn for it to survive the expected economic downturn. Around €40bn is expected to come from the rescue package previously arranged with Spain's EU partners in June. The remainder will be raised in private offerings by the banks themselves.

In its regular weekly Credit Outlook, Moody's analysts Maria Jose Mori and Alberto Postigo appeared unimpressed by the Spanish bank audit conclusions.

"The recapitalisation amounts published by Spain are below what we estimate are needed for Spanish banks to maintain stability in our adverse and highly adverse scenarios," the pair wrote. "According to our estimates, banks will need between €70 billion and €105 billion of capital to recognize their embedded losses upfront and still meet the 8% or 10% capital requirements established in previous legislation."

Independent US ratings firm Egan Jones slashed its own rating on Spain deeper into junk status Monday, the seventh cut so far this year, taking it to CC from CC+.

Spain's unemployment rate rose again in September as the summer tourist season failed to add jobs to the sagging economy.

Nearly 5 million Spaniards are out of work, according to official Labour Ministry figures released Tuesday, after a 1.7 percent rise in the jobless rate added another 79,645 to unemployment rolls. The numbers represent the second consecutive monthly rise during the peak of the tourist season and will make grim reading for Prime Minister Mariano Rajoy and his Economy Minister, Luis de Guindos, as they prepare to implement their harsh deficit reduction measures amid one of the worst recessions on record. Spain's overall unemployment rate is now a record 25.1 percent.

Key dates before the Moody's decision will be the Eurogroup meeting of Eurozone finance ministes on 8 October, the European Leaders' Summit ten days later and regional elections in Galicia and the Basque Country on 21 October.