Fitch Cuts Spain 3 Notches to BBB From A

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 FXE is little changed on the news, but gold GLD has recovered slightly from the lows.