Market Overview

Fitch Cuts Spain 3 Notches to BBB From A

Related EWP
Mario Draghi's Comments Just Increased Easing Speculation
Why A Deal On Iranian Sanctions Looks Unlikely
Related EZU
The Biggest Surprise On Monday Wasn't Japan, Bank of England's Mark Carney, Mario Draghi Or Even David Cameron
Third Quarter ETF Fund Flows Show Broad Market Buying

Fitch Ratings today announced that they have cut Spain's long-term rating to BBB (compares to BBB+ at S&P so still investment grade) from A, a three notch downgrade, and have kept the nation on negative watch. Fitch also estimates that the required banking recap is as high as 100 billion euros, or 9% of Spanish GDP. Of the three major rating agencies, only Moody's now rates Spain above A and Egan-Jones has the nation rated at B, which is 6 notches below Fitch.

From the company: "Fitch Ratings has downgraded Spain's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB' from 'A'. The Short-term IDR has also been downgraded to 'F2' from 'F1'. The Outlook on the Long-term IDRs is Negative." They cite the cost of recapitalizing the banking sector, growing debt-to-GDP levels, a continued domestic recession, Spain's level of foreign indebtedness, and the reduced financing flexibility of the government.

The scary part about this downgrade is that Spain is now on the cusp of entering the Step 3 collateral bucket at the ECB. A downgrade by Moody's to below A would put Spain into this bucket, which would automatically incur further haircuts on Spanish debt repo'd at the ECB. What this means is that banks who rely on the ability to repo Spanish debt will take an automatic 5% loss, as they are forced to pay up collateral calls of that amount. Spanish banks are already on shaky grounds and this would only make it worse.

The Euro (NYSE: FXE) is little changed on the news, but gold (NYSE: GLD) has recovered slightly from the lows.

Posted-In: News Bonds Forex Events Global Econ #s Economics Hot

 

Related Articles (EWP + EZU)

Around the Web, We're Loving...

Get Benzinga's Newsletters