Rating cut piles pressure on Spain to seek aid

Thu Oct 11, 2012 8:07am EDT
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By Paul Day and Rodrigo De Miguel

MADRID (Reuters) - Spain faced renewed pressure to take the politically humiliating step of seeking sovereign aid on Thursday after a credit agency cut its rating to near junk, triggering a spike in its borrowing costs.

Standard and Poor's said recession was limiting Spain's options on policy and said Madrid's delay in asking for aid could drag on the new rating, which it kept on negative outlook - indicating another cut is in prospect.

Another headache for the government came with data showing consumer prices rose at their fastest pace in 16 months in September, further depressing demand among cash-strapped consumers.

"We expect the current situation to continue to run until either market or political pressures become more acute," U.S. investment bank JP Morgan said in a note to clients. "The promise of ECB action may be holding back both sorts of pressure in the near-term, and there is little evidence to suggest that either will necessarily reappear over the next few weeks."

The European Central Bank's plan to buy the bonds of struggling governments has raised hopes of an end to the most acute phase of the euro zone's crisis. Spain's delay in asking formally for such aid is steadily undermining such hopes.

Prime Minister Mariano Rajoy, who has said he will only make an aid request decision when he had all the details, is thought to be waiting for regional elections October 21 and, if the ECB effect keeps debt costs down, he may delay a decision further.

While neither Rajoy or the euro zone's paymaster Germany seem keen for Spain to dive in to a rescue plan, further market pressure or a sovereign downgrade to junk would hasten the process, economists say.

"In the short term we suspect that the noise and column inches generated by the S&P downgrade will be disproportionate to its impact," Citi said in a note.   Continued...

People walk past a banner advertising sales in a shopping mall in Madrid October 9, 2012. REUTERS/Juan Medina