Offering some respite to the Spanish government that is under pressure to officially request a European bailout, Moody's Investors Service on Tuesday left its Spanish sovereign rating unchanged at investment grade, but with a 'negative' outlook.

For today's rating decision, the rating agency cited a number of positive developments since June, including the European Central Bank's announcement of the bond-purchase program and evidence of the Spanish government's continued commitment to implement the fiscal and structural reform measures.

Moody's has a Baa3 rating on Spanish government bonds. The ratings agency found that the risk of the Spanish sovereign losing market access has been materially reduced by the willingness of the ECB to undertake outright purchases of Spanish government bonds to contain their price volatility.

The rating agency believes Spain will likely apply for a precautionary credit line from the European Stability Mechanism (ESM). "Entry into an ESM precautionary program would not in itself lead to a downgrade as long as the rating agency believes that the government is likely to retain access to private capital markets," Moody's said in a statement.

The rating decision was also influenced by evidence of the Spanish government's continued commitment to implement the fiscal and structural reform measures that are needed to stabilize its debt trajectory.

Also, the ongoing progress towards restructuring the Spanish banking sector and enhancing the solvency of the affected banks is expected to restore market confidence in Spain's banking system as a whole.

Moody's said combined efforts by euro area, ECB and the Spanish government should allow the country to maintain capital market access at reasonable rates, providing it with the time it needs to stabilise public debt over the next few years.

The 'negative' rating outlook reflects Moody's assessment that the risks to its baseline scenario are high and skewed to the downside. Spain's credit standing would be negatively affected by a lack of progress in placing the country's public finances on a sustainable footing. Shocks at the euro area level could also have negative repercussions on the rating, Moody's said. Last week, rating agency Standard & Poor's downgraded the country's rating by two notches to BBB-, the lowest investment grade possible. S&P had highlighted the mounting risks to public finances from rising economic and political pressures, while warning of a possible further downgrade.

The deepening economic recession acts as a constraint in Spain's government policy actions. Further, drift between central and local governments are rising with local elections approaching.

Spain has so far avoided seeking an external bailout. The European Union leaders are meeting in Brussels on Thursday and speculations are rife that Spain will request a bailout very soon.

Earlier this month, the International Monetary Fund said Spain is likely to miss its deficit targets again despite significant fiscal measures taking effect in the second half of the year.

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