Spain calls early elections as Moody's threatens cut

Spain's left-leaning government has surprised markets by calling early elections for November this year, adding to investor nerves over its financial plight.

The move is seen as a way to gain further ground for the Socialists, which have seen their poll ratings improve as pressure on the country's finances increases.

Analysts said prime minister Jose Luis Rodriguez Zapatero's announcement could strengthen the government's leadership through its debt difficulties, but said it was unlikely to soothe markets.

"I'm not convinced an election alone, even if it creates a fairly stable new government, will calm down markets. What we've seen in the last 18 months is that there are events that have a short-term impact on the markets," said David Bach, economist at IE Business School.

The news came shortly after rating agency Moody's placed Spain on review for a possible downgrade, citing weak growth and funding pressures,.

Moody's placed Spain's Aa2 government bond ratings on review for possible downgrade and said funding costs would remain high for the Spanish government in the wake of the Greek package which signalled a clear shift in risk for bondholders.

The package set a precedent for private sector participation in future sovereign debt restructurings in the euro area, Moody's said.

"The rating agency ... notes that challenges to long-term budget balance remain due to Spain's subdued economic growth and fiscal slippage within parts of its regional and local government sector," the agency said in a statement.

The euro fell more than 40 pips after the Moody's release.. It traded down 0.3 percent at $1.4286, close to an intraday low.

International investors are concerned the eurozone's fourth largest economy, hamstrung by anaemic growth rates and high unemployment, will fail to put its fiscal house in order and need a Greek-style bailout, nervousness which has sent bond yields to their highest level in over a decade.