Spain's rating cut to Aa2 by Moody's

Spain’s credit rating was cut to Aa2 by Moody’s Investors Service, which said the cost of shoring up the banking industry will eclipse government estimates. The euro weakened and Spanish bond yields rose.

Spanish lenders will need as much as ¤50 billion ($69 billion) to meet new capital requirements, Moody’s forecast, more than double the ¤20 billion seen by the government. The risks to public finances are “skewed to the downside,” the company said in a statement today. The outlook is “negative,” suggesting more rating cuts are under consideration.

Spain has taken unprecedented measures to avoid following Greece and Ireland into a bailout, implementing the deepest budget cuts in at least three decades. As European leaders negotiate a reinforced rescue effort, Spain is tightening capital requirements for banks in a bid to show investors that its lenders can weather a fourth year of economic slump with an unemployment rate over 20 per cent.

“This will put extra pressure on EU policy makers when they meet later in the month to offer some kind of credible solution to the crisis, including raising the funds available to back countries which at least at this stage do not have a real solvency problem, such as Spain,” said Sebastian Paris-Horvitz, chief market strategist at HSBC Private Bank Suisse.