MADRID Moody's downgraded Spain's sovereign debt rating on Thursday as it more than doubled its estimate on the banking sector's funding needs, but the Bank of Spain said the shortfall was much less.
The ratings agency warned it was ready to further downgrade Spain's rating, now at Aa2, as it expects bank restructuring will cost 40 to 50 billion euros ($69 billion), whereas the Bank of Spain estimated the shortfall at just 15 billion euros.
"(Moody's) believes there is a meaningful risk that the eventual cost of the recapitalization effort could considerably exceed the government's current projections," the ratings agency said in a statement.
The Bank of Spain's estimate of a 15 billion euro shortfall, released on Thursday, was well within an earlier government estimate of a maximum of 20 billion euros and significantly undercut analyst estimates of a funding hole of up to 120 billion euros.
However, the central bank said eight savings banks fell short of government capital ratio targets, led by the biggest, Bankia, with a 5.8 billion euro shortfall, although that would shrink to 1.8 billion euros if Bankia goes ahead with its planned stockmarket listing. Nova Caixa Galicia has a 2.6 billion euro shortfall, the central bank said in a report.
The Spanish units of Deutsche Bank and Barclays did not meet the Bank of Spain's capital requirements. Barclays' unit needs 552 million euros to reach a core capital ratio of 8 percent and Deutsche's Spanish unit needs 182 million euros, the central bank said.
The downgrade of Moody's rating, from Aa1, drove the euro lower against the dollar and the premium on Spanish 10-year debt instead of German Bunds expanded to its widest point in two months at 227 basis points.
Spanish sovereign debt prices had recently stabilized after months of volatility, as investors became less concerned Spain could follow Greece and Ireland in needing a financial bailout.
Economists said there was a wide gap between private and official estimates for banks' capitalization needs. The banking system's problems stem from heavy lending to property developers during a real estate boom that subsequently burst.
"The broader debate that still has not been addressed is the asset valuations to the property sector that the banks have and until we see that, markets will remain nervous over the outlook for Spain's banks," said Jacques Cailloux, economist at Royal Bank of Scotland.
COST OF BORROWING RISES
Moody's said the overall cost to recapitalize the banking sector could rise to around 110 billion to 120 billion euros in a situation of economic stress.
Ratings agency Fitch later estimated the shortfall in Spain's banking system at 38 billion euros.
Moody's still rates Spain as a high grade investment proposition. By way of comparison, the agency rates Portugal two notches lower and Greece far down with junk status.
A steep bank bill for Spain would heighten risk.
"Given the cost of bailouts in countries like Ireland, the forecast given by the government looks low," said Ben May, economist at Capital Economics.
GHOSTS OF IRELAND?
Standard & Poor's downgraded Ireland last August when it raised its estimate of the cost to the government of recapitalising the banks to 45 billion to 50 billion euros.
The Irish government at the time stuck to its estimate of a recapitalization cost of 22 billion to 25 billion euros.
Dublin has since pumped 46 billion euros into its banks and may have to put in even more after the results of stress tests at the end of March.
European shares slid to a year low as the Spanish downgrade raised concerns about peripheral euro zone economies.
Moody's rating is now in line with Standard & Poor's rating of AA. The other major ratings agency, Fitch, has a rating one notch higher at AA+, but last Friday revised its outlook on Spain to negative.
A Fitch spokesman said the agency would not specify a deadline to act on its revision on Spain's outlook but said it would be a "relatively short period".
Moody's also noted that nine of Spain's 17 autonomous regions have breached budget deficit targets.
"This casts doubts over the ability of the central government to exercise sufficient control over the regions to ensure compliance with deficit targets," it said.
But it said it still believed Spain's debt was sustainable and its baseline assumptions did not anticipate a need for the Spanish government to ask for an EU bailout.
The European Central Bank has signaled it could raise interest rates in April to combat inflation in the euro zone.
Spain is vulnerable to the tightening cycle because of its high percentage of floating rate mortgages, low economic growth and fragile banking sectors. (Additional reporting by Nigel Davies and Judith MacInnes; Editing by Fiona Ortiz and Susan Fenton)