More pain in store for Spain as another downgrade looms

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There's more pain in store for Spain as speculation mounts that the nation may be downgraded to junk by Moody's Investors' Service as the cost to insure Spanish corporate debt against a default surges near record highs.

Credit default swaps on Spain's largest bank, Santander rose 23 per cent this quarter to 454 points, nearing their all-time high of 474 points in November, while that on phone company Telefonica soared by 70 points to a record 540 basis points.

Spain's sovereign borrowing costs have soared to record high levels in recent weeks as the nation's deepening banking crises threatens to worsen the health of the Spanish government's finances.

Moody's has been particularly severe on Spain as on Monday it downgraded 28 Spanish banks following a three level cut in the nation's credit rating earlier this month.

Spain is now rated Baa3 by Moody's, one step above junk territory. Spain remains under review for another cut after it sought a bailout of 100 billion euro this month to recapitalize its struggling lenders.

The 100 billion euro aid will add to Spain's debt pile, with the nation's public debt to GDP ratio expected to rise to over 90 per cent at the end of 2012 from less than 40 per cent in 2007.

Spain is tipped to miss its budget deficit targets for this year, the IMF warned recently. The government's budget deficit widened to 3.4 per cent of the nation's GDP in the first five months of 2012 from 2.59 per cent in the same period last year as the government failed to control spending, while a recession crimped tax revenue.

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