Rating cut puts Spain back on crisis radar (Reuters)

MADRID (Reuters) – Standard & Poor's cut Spain's credit rating Friday, sending the euro briefly lower and underlining the challenges facing Europe's major powers as they meet G20 counterparts over the euro-zone debt crisis.

S&P, whose move mirrored that by fellow ratings agency Fitch last week, cited high unemployment, tightening credit and high private-sector debt among reasons for cutting the nation's long-term rating to AA- from AA.

Spanish 10-year government bond yields rose slightly in response, although they remained almost 60 basis points lower than those of Italy and, at 5.27 percent, some distance from the 7 percent level widely regarded as unsustainable.

"Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain's main trading partners," S&P said.

It also noted the "incomplete state" of labor market reform and the likelihood of further asset deterioration for Spain's banks, and downgraded its forecast for Spanish economic growth in 2012 to about 1 percent, from the 1.5 percent it forecast in February.

High yields on Spanish government bonds point to concerns that it could be the next euro zone economy to require a Greece-style bailout, and despite an unpopular austerity program, doubts remain that Spain will meet its deficit target of 6 percent of GDP this year.

The Financial Times quoted a senior Spanish official as saying that meeting the 6 percent deficit target would be "difficult."

But Spain's Economy Minister Elena Salgado said later on Friday that there would be some margin for maneuver this year thanks about 2 billion euros raised by an auction of wireless frequencies and lower interest payments.

"Interest payments by the central government will be at least 2 billion euros below budget. So the combined effect of the spectrum auction and lower interest payments will mean we have a margin of 0.4 percent (of GDP)" Salgado said.

BETTER PIIGS

S&P announced the downgrade as finance ministers and central bank chiefs from the world's 20 biggest economies were due to meet later Friday in Paris amid pressure to find an urgent and convincing solution to the deepening debt crisis.

Spanish unemployment, at 21 percent, is the highest in the European Union, reflecting a stagnant economy, the collapse of a decade-long housing boom and cuts aimed at taming a public sector deficit that reached 11.1 percent of GDP in 2009.

The decision to shelve multi-billion-euro privatization plans, mainly due to tough market conditions, has meanwhile deprived the state of much needed revenues.

"The market's perception of Spain is that it's in a stronger position (than other debt-laden states) - with a strong defense on bank capitalization in place from the FROB bad bank fund, aggressive government action to control and cut spending and a 70 percent debt/GDP ratio," said Bill Blain, senior director at broker NewEdge Group.

"The biggest problem, but the issue I read least about, is the unresolved crisis between central government making cuts and the reticence of regions to follow," he said.

Salgado said the government will shortly announce its plans to ensure Spain's heavily-indebted regions meet their tough 2011 deficit targets.[nE8E7L700E]

JOB DILEMMA

A botched labor market reform in 2010 did little to alleviate joblessness that is concentrated mainly amongst younger Spaniards, and a new government after November 20 general elections will be under pressure to tackle the issue.

The center-right People's Party is expected to win the election easily and deepen austerity measures but they have shied away from presenting specific policy measures for fear of eroding public support.

Like Fitch, which also now rates Spain at AA-, S&P signaled further possible downgrades for Spain, saying there was still a risk the euro zone's fourth-largest economy could slip into recession next year, with a 0.5 percent contraction.

The euro reached a session low of $1.3723 after the downgrade, but later recovered on reports the European Central Bank was buying Spanish and Italian debt.

Hopes that G20 officials would agree on the outlines of a plan to resolve the debt crisis ahead of a European Union summit on October 23 also buoyed the shared currency, which remained on course for its biggest weekly rally since January.

Spain's blue chip index was little affected by the rating cut.

Finance chiefs from outside the euro zone are expected to speak frankly when they meet their European counterparts at Friday's G20 meeting, given impatience growing over the crisis and its implications for the rest of the world.

Thursday, Fitch cut credit ratings or signaled possible downgrades for several major European banks. It downgraded UBS and Royal Bank of Scotland. It also placed Barclays Bank, BNP Paribas, Credit Suisse, Deutsche Bank and Societe Generale on watch negative.

(Reporting by Balazs Koranyi, Mark Bendeich, Elisabeth O'Leary and Judy MacInnes; Editing by Catherine Evans and Patrick Graham)

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Spain: bullfighter survives terrifying face goring (AP)

MADRID – A Spanish bullfighter is likely to suffer facial paralysis and lose the sight in one eye after a terrifying goring, the hospital treating him said Saturday.

Television images showed the moment when the bull's left horn ripped into Juan Jose Padilla's lower jaw to emerge beside his protruding eyeball as spectators in the northeastern city of Zaragoza screamed in horror.

Padilla is in a stable condition and recovering from a five-hour operation to repair his face, the statement from the Miguel Servet Hospital said.

It said Padilla, 39, suffered eye, bone, muscle and skin damage when the bull pinned him to the ground and gored him. Surgeons had not been able to repair a severed facial nerve.

TV footage also showed Padilla getting up from the ring, his face gushing blood, as the bull was distracted by bullring assistants.

"I can't see, I can't see anything," the matador shouted as he was rushed to emergency facilities at Zaragoza's Misericordia bullring before being driven to the hospital.

The bull, named Marques, weighed 508 kilograms (1,120 pounds) and was the second fighting beast Padilla had faced late Friday, during the second day of the annual Virgen del Pilar festivities in Zaragoza.

Surgeons used titanium plates and mesh to reconstruct parts of Padilla's facial bone structure and eye socket, doctors Simon Sanz and Nadal Cristobal said in a very detailed, signed statement.

Padilla was lucky the horn did not penetrate his brain, said Vicente Yesteras, one of Padilla's retinue of bullring helpers.

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Moody's threatens Spain rating cut (Reuters)

MADRID (Reuters) – Rating agency Moody's put Spain on review for a possible downgrade on Friday, adding to concerns that a Greek rescue package has done little to halt the spread of Europe's debt crisis.

Moody's move to place the Aa2 government bond rating on review cited concerns over growth and said funding costs would continue to be high in the wake of euro zone leaders' bolder moves to curb the Greek crisis last week.

That added to a sense that Spain - and Italy - are still firmly in the firing line, and the euro and Spanish bond prices fell in response.

Particular focus rested on Spain's regional governments, many of whom are struggling with burgeoning debt loads after a decade of reckless spending. Analysts fear control over regions' debt loads is slipping out of the central government's grasp.

Regional authorities will miss their collective budget deficit target by up to 0.75 percent of gross domestic product (GDP), Moody's said, hampering the central government's program of austerity to reduce the overall shortfall.

"Regional governments' finances may prove difficult to control due to structural spending pressures, particularly in the healthcare sector," Moody's said in a release.

International investors are concerned the euro zone's fourth largest economy, hamstrung by anemic 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.

Moody's current rating for Spain is in line with fellow rating agency S&P's AA setting, while Fitch Ratings has the country one notch higher at AA+

PERMANENT BURDEN

The euro fell more than 40 pips against the dollar in response and Spanish bond yields rose. Spain's cost of borrowing over ten years is now 6.11 percent compared to the 7 percent level broadly seen as unsustainable for the euro zone governments at risk in the crisis.

The country's rating remains at a high investment grade, far above those of Greece, Portugal and Ireland.

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

"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 U.S. bank Citi.

The Spanish Treasury said the external arguments supporting the ratings review relied excessively on short-term market developments in a letter sent to investors on Friday morning and seen by Reuters.

"Moody's assumes that the current high yields that have been generated by the resolutions around the Greek crisis will become a permanent burden on non-AAA sovereign funding costs," the Treasury said.

Spanish bank shares also fell over 2.4 percent as Moody's placed the debt and deposit ratings of five Spanish banks, including the euro zone's biggest bank Santander, on review for downgrade, in line with the sovereign.

RESCUE FUND CONCERNS

While the Greek rescue package set a precedent for private sector participation in future restructuring in the euro area, Moody's highlighted concerns about when or how the euro zone's rescue fund (EFSF) would be able to engage more strongly in battling 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 placed the Aa2 rating of Spain's bank restructuring fund, the FROB, on review for possible downgrade as its debt is underwritten by the sovereign.

The agency also downgraded the ratings of six Spanish regions reflecting the deterioration in their fiscal and debt positions. The regions were Castilla-La Mancha, Murcia, Valencia, Catalonia, Andalusia and Castilla y Leon.

It placed a further seven regional debt ratings under review for downgrade.

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.

"That the regions are going to overshoot is clear," said Antonio Garcia Pascual, chief economist for Southern Europe at Barclays Capital in London.

"The question will be whether the central government can create a buffer which is big enough to offset that effect, and that is going to be complicated. In the fourth quarter all the skeletons will start to come out of the closet."

According to a Deutsche Bank study, if all the regions with a deficit above 3 percent in 2010 follow Catalonia's lead in missing the deficit target by a third, it would inflate the overall public deficit by 0.64 percentage points.

The government is aiming for an overall public deficit of 6.0 percent of GDP this year, compared to 9.2 percent of GDP in 2010 -- something that also largely depends on growth.

Data on Friday showed Spain's unemployment inched down to 20.9 percent in the second quarter, remaining by far the highest in the EU.

"There seems to be an indication that there's some stabilization, but the key point is the labor market remains extremely distressed," economist at RBS Silvio Peruzzo said.

(Additional reporting by Paul Day; Writing by Sonya Dowsett; editing by Patrick Graham)

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