Spain Must Cut Budget Deficit To Keep Aaa Rating - Moody's

Spain will need to narrow its budget deficit to retain its Aaa sovereign credit rating, a Moody's Investors Service analyst said Tuesday, underscoring pressure on European countries to fix their public finances.

Moody's Investors Service Sovereign Risk Unit Managing Director Bart Oosterveld said the ratings firm discussed with Spain last year the need to bring its budget deficit "back down" and that need remains a key consideration in its view on the country's rating.

"That's going to be a key factor for the rating" Oosterveld told Dow Jones Newswires in an interview on the sidelines of a media briefing in Singapore.

"It has a stable outlook" he said in reference to Moody's Aaa rating on Spain.

"No rating or outlook is ever guaranteed to be in existence forever but for now it has a stable outlook."

Oosterveld also said that the rating agency had factored consolidation in the banking sector into its outlook on Spain.

Following Greece's fiscal deterioration there has been increasing speculation about which other European countries may be next to run into sovereign debt problems.

Fitch last month cut Spain's sovereign credit rating to AA+ with a stable outlook from AAA, while Standard & Poor's had cut Spain's sovereign credit rating to AA from AA+ in April.

Tom Byrne, senior vice president and regional credit officer with Moody's, said in the same briefing that Spain entered the current crisis in a better fiscal position and with smaller budget deficits than other countries in the euro zone.

Johannes Wassenberg, managing director with Moody's European banking team, said current consolidation in the Spanish banking system - which includes cost cuts and job layoffs - is now driving "some medium-term viability" to return to the system.

He noted that Spanish government and private banks have been suffering from a loss of market confidence.

"The Spanish government needs to regain that confidence by showing determination to clean up the exposure to the real estate market" he said at the briefing.

"As long as the (European Central Bank) provides the funding that keeps the costs down but also keeps the funding flowing and they can weather that storm, then the Spanish banking system is not as bad as the current markets seem to think" he added.