Spain under pressure on debt as EU leaders meet

As European leaders prepared for a crucial summit, markets and credit agencies piled the pressure on Spain and the euro once again yesterday – with a turbulent end to a dramatic year in prospect.

Though the sovereign debt crisisaffecting Europe's fringe economies has barely abated since Ireland's €85bn (£72bn) bailout earlier in the month, a move by Moody's to review Spain's AA1 credit rating threatened even more trauma for the troubled single currency. It suggests the close of 2010 is unlikely to mark the end of the setbacks that have afflicted the euro since the collapse of confidence in Greece in May. The German Chancellor, Angela Merkel, has declared that no nation will be "abandoned".

Sources in the EU suggest that the €770bn EU/IMF bailout fund will not be topped up at this week's summit, but that the prime ministers and presidents will concentrate on more permanent future arrangements to help countries in difficulties.

Moody's said it "continues to view Spain as a much stronger credit than other stressed eurozone countries" and that the review would "mostlikely conclude that Spain's rating will remain in the AA range".

Nonetheless, news of Moody's forthcoming review prompted more despondency in the markets, and Spanish bond yields rose again, closing at their highest level in a decade. The borrowing costs for most other European nations also picked up, as the "contagion" spread once again. The eurozone's difficulties have also been exacerbated by a general global sell-off of government bonds in recent days.

Kathrin Muehlbronner, Moody's Spain analyst said: "Moody's does not believe that Spain's solvency is under threat." However, Spain's substantial funding requirements, not only for the sovereign government but also for the regional governments and the banks, make the country "susceptible to further episodes of funding stress".

Spain's Minister of Finance, Elena Salgado, said Spain's rating demonstrated her nation's solvency: "I expect within three months we shall be able to offer enough arguments to turn that negative outlook into a positive one."

The euro was down to $1.33 (£0.85) in trading but remained above the benchmark $1.30 mark.

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