Market Overview

Fitch Cuts Spain 3 Notches to BBB From A

Share:
Related EWP
Hay Problemas For The Spain ETF
Maybe Some Relief For The Spain ETF
Fearing The Worst, The ECB Tells Mr Market To Expect The Best (Seeking Alpha)
Related EZU
President-Elect Trump Could Be A 'Shot In The Arm' For Japan And EU
IMF Cuts Global Growth Forecast Citing Brexit Blowback
Why Productivity Growth Is Faltering In Aging Europe And Japan (Seeking Alpha)

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 Best of Benzinga

 

Related Articles (EWP + EZU)

View Comments and Join the Discussion!