Moody's Investors Service on Tuesday confirmed its rating on Spain's government debt but assigned a negative outlook, signaling that a downgrade is still possible in the coming months.
The rating agency said Spain's efforts to improve its financial position and the European Central Bank's willingness to lend support should give the government the time and flexibility it needs to stabilize its public debt over the next few years.
It cited the government's commitment to measures that are helping bring Spain's debt burden under control. Spain has introduced a batch of austerity measures and financial and labor reforms to try to convince EU partners and investors that it is serious about getting its finances in shape.
Moody's kept Spain's rating at "Baa3", its lowest investment-grade rung.
The negative outlook reflects Moody's recognition that the risks are still high for the financially troubled country. Spain's rating could be undercut by a lack of progress toward stabilizing the country's finances, or by external factors, such as Greece exiting the 17-country bloc that uses the euro, Moody's said.
The move by Moody's comes after rival agency Standard & Poor's last week downgraded its rating on Spain's, leaving it also just one notch above junk status. S&P said the country's deep recession, high unemployment and street protest were limiting the government's options to deal with the financial crisis.
Spain's government and banks are struggling through the country's second recession in three years, with unemployment at roughly 25 percent. The government is also deciding if it will request a bailout from the European Central bank.
Rating agency reviews indicate how risky an asset is to hold and can have an impact on its ability to borrow money at competitive rates.
S&P also said the government's hesitation in requesting a bailout was raising the risk of its rating. While some expected that would nudge the Spanish government toward making a bailout request sooner rather later, it's unclear how Moody's decision will affect its temperament.