The euro sank and German Bunds jumped after Moody’s put Spain’s Aa2 government bond ratings on review, citing concerns over growth and saying funding costs would continue to be high in the wake of euro zone leaders deal on Greece last week.

Spain’s rating is still set at a high investment grade, far above those of Greece, Portugal and Ireland — the countries bailed out in the crisis so far.

But while Moody’s said any cut for Spain would likely be limited to one notch, it said the Greek package had signalled a clear shift in risk for bondholders across the euro zone.

“The rating agency … notes that challenges to long-term budget balance remain due to Spain’s subdued economic growth and fiscal slippage within parts of its regional and local government sector,” the agency said.

Its current rating for Spain is in line with SP’s AA setting, while Fitch has the country one notch higher at AA+.

International investors are concerned the euro zone’s fourth largest economy, hamstrung by anaemic growth rates and high unemployment, will fail to put its fiscal house in order and need a Greek-style bailout. Nerves about that have sent bond yields to their highest level in over a decade.

The euro fell more than 40 pips against the dollar on Moody’s announcement, nearing morning lows at $1.4281. Bund futures rose over half a point while early indications were of higher Spanish yields.

“The trigger is that the (Greek) deal last week has not really rebuilt confidence across the euro zone so Spain is still on their radar screens with costs rising,” said Giada Giani, analyst at Citi.

The Greek rescue package set a precedent for private sector participation in future sovereign debt restructuring in the euro area, Moody’s said. But it highlighted concerns prevalent in markets in recent days that it was unclear when the euro zone’s rescue fund would be empowered to intervene more strongly in the crisis.

“The package has not relieved market concerns over the position of such sovereigns because (i) it sets a precedent for private sector participation in future sovereign debt restructurings in the euro area, and (ii) while an expansion of powers has been proposed for the EFSF, it is not clear when the powers will be implemented,” the agency said.

Moody’s also placed the Aa2 rating of Spain’s bank restructuring fund, the FROB, on review for possible downgrade as its debt was fully and unconditionally guaranteed by the government of Spain.

The agency also downgraded the ratings of six Spanish regions.

The Spanish government has set a deficit target of 1.3 percent of gross domestic product for the 17 regions for this year and next, but some of their new governors say this will be impossible due to previous leaders’ fiscal mismanagement.

(Writing by Sonya Dowsett; editing by Patrick Graham)

Article source: http://www.nytimes.com/reuters/2011/07/29/business/business-us-spain-moodys.html?partner=rss&emc=rss