Moody's slashes Spain debt ratings three notches

NEW YORK Wed Jun 13, 2012 6:01pm EDT

A woman stands next to Spanish flags as she waits to enter a building in central Madrid June 13, 2012. REUTERS/Susana Vera

A woman stands next to Spanish flags as she waits to enter a building in central Madrid June 13, 2012.

Credit: Reuters/Susana Vera

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NEW YORK (Reuters) - Credit ratings agency Moody's Investors Service cut its rating on Spanish government debt on Wednesday by three notches to Baa3 from A3, saying the newly approved euro zone plan to help Spain's banks will increase the country's debt burden.

Moody's, which also said it could lower Spain's rating further, cited the Spanish government's "very limited" access to international debt markets and the weakness of the national economy.

The rating is on review for possible further downgrades, which could come within the next three months, Moody's said.

"We will of course also take into account whatever the details are that come out on the size and the terms of the (bank) support package, and also take into account what's going on in the wider euro zone" in weighing further downgrades, said Kathrin Muehlbronner, a Moody's analyst in London.

That includes both Sunday's election in Greece and an upcoming European summit at the end of the month, she said.

A spokeswoman at Spain's Economy Ministry in Madrid declined to comment.

"The Spanish economy's continued weakness makes the government's weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years," Moody's said in a statement.

Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125.74 billion) to shore up its teetering banks, and Madrid said it would specify precisely how much it needs once independent audits are completed in just over a week.

"In our view, that's (the aid request) not a sign of strength, that's a sign of weakness," Muehlbronner added, noting the Spanish government's growing dependence on its domestic banks as buyers of sovereign debt.

"We do see an increasing risk of Spain needing to ask for more support in the coming months or in the coming years," she said.

Moody's now puts Spain's rating one notch above junk status. Standard & Poor's rates Spain two notches higher at BBB-plus with a negative outlook. Fitch Ratings cut Spain's rating by three notches on June 7 to BBB - one notch above Moody's - and put a negative outlook on the credit.

($1 = 0.7953 euro)

(Reporting by Daniel Bases and Luciana Lopez; editing by William Schomberg, Gary Crosse)

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