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2010-12-15 07:07:59
The euro has fallen against key currencies after a credit rating agency said it may downgrade Spain's debt.
Moody's put Spain's rating on review - citing concerns about its mounting debt and its funding needs for next year.
Spain has been under financial market scrutiny since the Irish Republic was forced to take an aid package of 85bn euros ( 72bn; $113bn) last month.
But Madrid denies similarities between the two economies, despite worries over Spain's property and banking sectors.
Moody's comments pushed the euro down by 0.7% against the dollar to to $1.329, while it also fell 0.1% against the pound, with one euro worth 0.8475 pence.
"News that Moody's has put Spain's debt rating on review has knocked the euro," said Rabobank analyst Jane Foley.
"It plays on fears that contagion could extend to the Spanish bond market, though it does not enlighten the market much further with respect to the underlying issues with respect to Spain."
'Challenging'
Spain's government has insisted it will not need to apply for a bail-out from the European Financial Stability Facility (EFSF) - an EU- and International Monetary Fund (IMF)-backed rescue scheme.
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2011 will be the year when the financial credibility of Spain - and by extension the eurozone as a whole - is likely to receive its severest test
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image of Robert Peston Robert Peston Business editor, BBC News
Moody's agreed that it did not expect Spain to draw on the fund - but added its "funding requirements, not only for the sovereign but also for the regional governments and the banks, make the country susceptible to further episodes of funding stress".
It believes that the central government needs to raise about 170bn euros next year with a further 30bn euros for the regions and 90bn for the banks.
This was "rendered more challenging by the fragile confidence of international capital markets," it said.
Moody's cut Spain's sovereign debt rating from the top, triple-A rating to Aa1 in September.
Its analyst, Kathrin Muehlbronner, added that the "downside risks warrant putting Spain's rating under review" for a further downgrade.
But she added her firm continued to view Spain as "a much stronger credit than other stressed eurozone countries".
Bond impact
The threat of a downgrade was not a huge surprise, said Robert Ryan, a foreign exchange strategist at BNP Paribas in Singapore.
But he added: "This just focuses attention back on Spain".
The yield on Spanish bonds - essentially the interest rate which the government must pay in order to borrow money - increased on Wednesday.
The rising cost of borrowing reflects investors' concern about the outlook for the Spanish economy and its banking sector in particular.
On Tuesday, the Spanish government had to offer investors higher returns in its auction of government debt.
The yield on its 12-month bonds rose to 3.45%, up from 2.37% in a similar auction last month.
And markets will be watching closely another auction of Spanish debt - planned for Thursday.
These will be for longer term bonds which are seen as a greater risk.
The eurozone has come under increasing scrutiny since Greece needed a 110bn-euro bail-out from the EU and IMF in May.
After the Irish Republic's bail-out, Portugal was tipped by many as the next casualty, with questions also raised over Italy's economy, as well as Spain's.
Later on Wednesday, the Irish parliament is due to vote on its bail-out loan.
The decision of Prime Minister Brian Cowen to seek parliamentary approval has delayed the IMF approving its portion of the funds for the Republic.