(changes dateline, re-ledes with Moody's downgrade)


Credit ratings agency Moody's slashed Spain's sovereign credit rating by three notches Wednesday, from A3 to Baa3, and said it had placed the country "on review for further downgrade."

Moody's justified the action by saying the impending EU rescue of Spanish banks will further increase the country's debt burden and pointing to the Iberian nation's "very limited financial market access" and continued economic weakness.

The main reason for the downgrade was the fact the government needed external aid to recapitalize its financial system, Moody's senior analyst Kathrin Muehlbronner told Efe.

She said Moody's sees the request for assistance as a sign of weakness because the Spanish government was unable to shore up its banks on its own.

Moody's now expects Spain's public debt to rise to 90 percent of gross domestic product by year's end, significantly more than what the agency was expecting and one of the most drastic increases seen in recent years, Muehlbronner said.

In its review for potential further downgrade, Moody's said it will examine the results of ongoing external audits of Spain's financial system and the "details" and "conditionality" of the aid announced last week by the Eurogroup meeting of eurozone finance ministers.

Wednesday's downgrade by Moody's comes less than a week after Fitch Ratings lowered Spain's long-term credit rating by three notches and said its outlook for the country was negative.

Market pressure on Spain caused the yield on its benchmark 10-year bond to climb to 6.75 percent at the close of Wednesday's session, a new euro-era record.

Spain's risk premium, the extra return investors demand on Spain's 10-year bond compared to equivalent safe-haven German debt, rose in turn to 526 basis points.

After closing Tuesday at 6.71 percent, the yield on the Spanish 10-year bond rose Wednesday on the secondary market due in part to investors' concerns about conditions associated with recently approved eurozone financial aid for Spanish banks.

Economists consulted by Efe also attributed the higher interest rate to market fears that the results of Greece's June 17 general parliamentary elections will lead to that country's exit from the euro.

Amid the bond market woes, Spanish Prime Minister Mariano Rajoy said Wednesday that at a June 28-29 summit of European Union leaders he will call for greater fiscal and banking integration to help resolve the eurozone financial crisis.

Appearing before Parliament, Rajoy was repeatedly questioned by opposition lawmakers about the conditions and details of a loan of up to 100 billion euros (about $126 billion) approved Saturday at the Eurogroup meeting.

He said the aid is necessary because Spain does not have that amount available at this time and, alluding to the high interest rates on Spanish bonds, "cannot issue debt" to obtain it.

Rajoy said Sunday that his government won't decide on how big a loan to request until officials receive reports from two independent consultants Spain commissioned to evaluate the condition of the country's ailing financial sector.

Both the premier and his economy minister, Luis de Guindos, said the loan - to be channeled through the state-backed Fund for Orderly Bank Restructuring, or FROB - would be specifically used to shore up troubled Spanish banks and will not entail additional austerity conditions for the country as a whole.

The funds are to be paid out of the European Financial Stability Facility and the European Stability Mechanism.

Rajoy said Wednesday he had sent a letter last week to high-ranking eurozone leaders calling for new measures to resolve the region's financial crisis.

The premier revealed the existence of the letter - dated June 6, three days before the eurozone finance ministers authorized the loan to recapitalize bad loan-saddled Spanish banks - and said he sent it to the presidents of the European Commission, Jose Manuel Durao Barroso, and European Council, Herman Van Rompuy.

In the letter, he said the eurozone was going through the "most severe crisis" in its history.

He also called for urgent action by the European Central Bank, saying the "pressure on many countries is rising" quickly and the euro "is at risk."

Rajoy said a commitment to the single currency requires greater union among the members of the 17-nation eurozone and for European leaders to make clear they will strengthen the currency bloc's "common institutional architecture."

In the fiscal arena, that would mean creating a fiscal authority to exercise centralized control over budgets and manage European debt, the prime minister said.

In the banking sphere, he recommended the establishment of a eurozone supervisory body and a common deposit guarantee fund.

Rajoy said that European leaders do not have to make a definitive decision at this time and that it is sufficient for them to "express their commitment to this objective and start working to design a plan, a timeframe and some conditions."

Spain's banks have been hard hit by the collapse of the country's 1995-2007 real estate boom, which has left them saddled with toxic property assets.

Recently nationalized BFA-Bankia - the country's No. 4 financial institution - is seeking what would be the largest bank bailout in Spanish history after saying on May 25 it needs another 19 billion euros (nearly $24 billion) to boost loss provisions.

The 2008 global financial meltdown came as Spain was struggling with the bursting of the property bubble. The ensuing slump has led to numerous business failures and pushed the country's jobless rate above 24 percent.

Nearly half of Spaniards under 25 are jobless and tens of thousands of families have been evicted from their homes after falling behind on their mortgages. EFE