WRAPUP 4-Spain gets debt warning before EU summit

* Moody’s gives Spain debt warning, but no bailout seen

* Spain says supports bigger crisis fund

* Portugal has to offer high yields on 3-month bills

* Merkel says Europe needs deeper union; no to e-bonds

(Adds Irish parliament approves EU/IMF bailout)

By Fiona Ortiz and Dave Graham

MADRID/BERLIN, Dec 15 (BestGrowthStock) – Ratings agency Moody’s
warned Spain on Wednesday its credit rating could be downgraded,
highlighting concerns about euro zone debt contagion on the eve
of a European Union summit.

Moody’s said it was concerned about Spain’s high debt
funding needs, its heavily indebted banks and its regional
finances, but it did not expect Madrid would have to follow
Greece and Ireland in seeking an EU bailout. [ID:nL3E6NF0D8]

Spain and Portugal have now come under intense market
pressure, raising concerns they could be driven into seeking an
emergency rescue when they hit funding crunches next year.

The cost of insuring Spanish debt against default and yields
on its 10-year government bonds rose on Wednesday, an indication
of the increased risk attached to Spain. The euro fell (Read more about the trembling euro. ) against
the dollar and European stocks lost ground. [ID:nLDE6BE19M]

“Europe remains very fragile. Everyone sees a major crisis
in the first few months of 2011 that would coincide with Spain’s
refinancing operations,” said Arnaud Poutier, deputy head of IG
Markets France. [ID:nLDE6BE0TY]

Spanish Economy Minister Elena Salgado said market movements
were being exaggerated by thin volumes at year-end, but that it
also made sense to enlarge a European financial rescue fund to
make sure it could tackle the crisis. [ID:nMDT009584]

EU leaders meet in Brussels on Thursday and Friday for their
end-of-year summit, with efforts to overcome the region’s
year-long debt crisis at the centre of their agenda.

They also face protests over austerity policies announced by
governments across Europe to repair their public finances.

Greek protesters clashed with police and set fire to cars
and a hotel as tens of thousands of people marched through
Athens. Riot police fired dozens of rounds of teargas and
hooded threw sticks and stones. [ID:nLDE6BD2FH]
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Euro zone graphic package http://r.reuters.com/hyb65p More on euro zone debt [nLDE6T0MG] BREAKINGVIEWS column on ECB [ID:nN13148472] Analysis on E-bonds [ID:nLDE6BB0GN] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

“FRANKLY LAUGHABLE”

Irish Prime Minister Brian Cowen won parliamentary support
for Dublin’s 85 billion euro ($113.2 billion) IMF/EU bailout on
Wednesday, clearing the way for the IMF to approve the first
disbursement later this week.

But opposition parties voted against the terms of the rescue
package and vowing to unpick them if, as expected, they oust
Cowen’s unpopular government at an early election next year.

The main opposition party Fine Gael party said it felt no
moral or legal obligation to honour all Irish banks’ debts to
bondholders and would try to renegotiate the interest rate on
the EU/IMF loans. [ID:nLDE6BE19I]

Finance Minister Brian Lenihan said it was “frankly
laughable” for the opposition to suggest it could negotiate a
better interest rate than the 5.8 percent set in the deal.

As well as approving a change to the EU’s treaty demanded by
Germany to create a permanent system for handling crises from
mid-2013, the EU leaders will discuss how they can improve the
current temporary financial safety net — a 750 billion euro ($1
trillion) joint EU/IMF loan facility. [ID:nLDE6AS0TL]

One possibility is to increase the size of the fund.
[ID:nLDE6BD13Z]

Belgian Finance Minister Didier Reynders said the EU’s
portion, 440 billion euros, could potentially be doubled to fend
off the threat of renewed market pressure on Portugal and Spain,
and Spain’s Salgado backed the idea of a larger fund.

“What we think is reasonable is that the real capacity of
the fund coincide with the theoretical capacity,” she said,
pointing out that while it is 440 billion euros in theory,
credit guarantees make it smaller than that in practice.

The EU’s leading powers, Germany and France, says less than
10 percent of the rescue funds have been committed so far, so
there is no urgent need to increase the money available.

German Chancellor Angela Merkel said no country in Europe
would be left on its own, and reiterated that the euro was a
strong currency that would be defended to the hilt.

“We know that the euro is our collective destiny, and Europe
is out collective future,” Merkel told parliament. “Nobody in
Europe will be abandoned. Europe will succeed together.”

European Commission President Jose Manuel Barroso urged
leaders to act fast to reach a consensus.

EU diplomats have worked to clear the decks of outstanding
issues before the summit so that discussions can focus on crisis
resolution. Officials fear financial markets may seize on a lack
of concrete action when trading picks up again next year.
[ID:nLDE6BD121]

The European Central Bank holds a regular, non-rate setting
meeting on Wednesday and Thursday, when it is expected to agree
to ask euro zone member states for more capital, a move to lower
its leverage as it helps tackle the debt crisis. [ID:nLDE6AS0TL]

That issue may be discussed among EU leaders on Thursday,
when they will be joined for dinner by ECB President Jean-Claude
Trichet. The ECB has come under pressure to step up its
bond-buying programme to help the likes of Ireland, Greece and
Portugal, who are struggling to fund themselves in the market.

ECB CAPITAL BASE

Germany said it would support giving the ECB more capital,
with an official saying a bigger base would show financial
markets that the central bank had the firepower to buy new
government bonds if needed. [ID:nLDE6BD1BK]

Portugal held its last debt auction of the year on
Wednesday, selling 500 million euros of three-month treasury
bills, but at a punitively high yield of 3.4 percent. Last month
it sold the same amount at 1.8 percent. [ID:nLIS002527]

Belgium, which saw the outlook on its sovereign debt lowered
by Standard & Poor’s on Tuesday, with the threat of a downgrade
within six months, is also a growing concern for policymakers.
And Spain’s regional banks have yet to resolve all their debts.

Top EU officials, including Luxembourg Prime Minister
Jean-Claude Juncker and the Italian finance minister, have
called for the euro zone to consider issuing collective treasury
bonds, or e-bonds, which would effectively mean the 16 euro zone
countries sharing credit risk and debt issuance.

Germany opposes the proposal, which would expose its credit
risk to the influence of riskier peripheral euro zone countries
such as Portugal and Greece. The issue may be raised at the EU
summit, but no decisions are expected.
(Additional reporting by Rex Merrifield and Marcin Grajewski in
Brussels and Brian Rohan and Annika Breidthardt in Berlin,
writing by Luke Baker and Timothy Heritage, editing by Kevin
Liffey and Paul Taylor)

WRAPUP 4-Spain gets debt warning before EU summit