A DOUBLE-NOTCH downgrade to Spain’s credit ratings has piled more pressure on European leaders to make rapid progress on solving the region’s debt crisis or face unbearable borrowing costs.

The fresh blow from Moody’s Investors Service came just a day after the agency warned France its triple-A rating could be at risk and overshadowed a report that Germany and France were nearer a deal on leveraging the euro zone’s rescue fund.

“If the euro zone can’t figure a way to handle the situation, you are going to see Spanish yields continue to go up, and they are going to have a problem to funding themselves,” said Jessica Hoversen, currency and fixed income analyst at MF Global in New York.

Investors are counting down to a summit of EU leaders this weekend that was originally hailed as a watershed event.

Moody’s cut Spain’s bond rating to A1, from Aa2, the third of the major agencies to act in recent weeks and taking it a notch below the ratings of Standard Poor’s and Fitch.

Moody’s reasoning made worrying reading for those hoping for a speedy resolution to country’s troubles.

“Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged and it will in any event take time for confidence in the area’s political cohesion and growth prospects to be fully restored,” the agency said.

In the meantime, Spain’s large sovereign borrowing needs, heavily indebted banking system and challenging growth outlook left it vulnerable to further downgrades, a judgment that would encompass all too many of EU members.

In particular, Moody’s said it continues to have serious concerns regarding the funding situation of the regional governments.

Spain has said it will deflate its public deficit to 6 per cent of GDP this year from 9.3 per cent of GDP in 2010, though many economists are concerned this could be derailed by a lack of fiscal discipline at regional level. The government’s regional deficit target is 1.3 per cent of GDP for this year.

“Not all the regions are the same. But we do think the regions will deviate from the aggregate [deficit] target for this year,” Kathrin Muehlbronner, senior analyst, Sovereign Group Moody’s told Reuters in a telephone interview on Wednesday.

Spain could be downgraded again if the euro zone debt crisis escalates further, Moodys warned.

Tuesday night’s rating action on Spain follows Moody’s recent rating actions on the sovereign ratings of Italy, cut to A2, with a negative outlook. – (Reuters)