Spain kept its investment grade credit rating from Moody’s Investors Service, which said the European Central Bank’s willingness to buy the nation’s debt reduces the risk of the country losing market access.
Moody’s assigned a negative outlook on its Baa3 rating, one step above junk, as it concluded a review for a possible further downgrade of Spain initiated in June, the New York-based company said in a statement yesterday.
The willingness of the ECB to purchase Spain’s government bonds on the secondary market “is an important step” for Spain to maintain access to credit markets, Kathrin Muehlbronner, a Moody’s analyst in London, said in a telephone interview.
Creditworthiness concerns have grown since Prime Minister Mariano Rajoy requested as much as 100 billion euros ($131 billion) in European Union aid to shore up Spanish lenders amid signals the nation may miss its budget-deficit goals. Standard & Poor’s downgraded Spain on Oct. 10, saying it doubted the loans will be mutualized among euro-region nations.
Spain’s 10-year bonds today advanced after the Moody’s decision, pushing borrowing costs to the lowest in more than six months. Spain’s 10-year bond yield fell 27 basis points to 5.54 percent at 1:38 p.m. in Madrid.
That compares with an intraday record of 7.75 percent on July 25, a day after Spain signed a document fixing the conditions for the bank aid. Even with those bond gains, Spain still pays 394 basis points more than Germany to borrow for 10 years.
Rajoy has held off on a decision about whether to request ECB and EU bond-buying to further lower borrowing costs. Deputy Prime Minister Soraya Saenz de Santamaria said on Oct. 11 that Spain first wants a consensus among European governments and more details on the attached conditions.
Spain avoided joining euro-region peers Cyprus, Portugal, Ireland and Greece as being rated below investment grade. S&P has a negative outlook on its BBB- rating, also one step above junk, and Fitch Ratings has Spain at BBB, two levels higher than junk.
Muehlbronner said she expects Spain to request a precautionary credit line from the European Stability Mechanism, the region’s permanent rescue fund “to be able to activate the ECB purchases in the secondary market.”
Spanish bonds starting rising yesterday after German lawmakers from Chancellor Angela Merkel’s Christian Democratic bloc indicated a rolling back of German resistance to a full sovereign bailout for Spain.
“The rating agency seems to gives its green-light to the upcoming precautionary program, which will open the door for ECB bond purchases,” Thomas Costerg, an economist at Standard Chartered Bank in London, said yesterday by e-mail. “Overall, Moody’s statement looks like a ‘stay of execution’ demonstrating a wait-and-see attitude.”
Moritz Kraemer, S&P’s head of sovereign ratings for Europe, the Middle East and Africa, said on Oct. 12 that “confusion” and a “two step forward, one step back kind of environment” in Europe contributed to the company’s downgrade decision.
Rating cuts have sometimes been followed by a decline in bond yields. In the U.S., Treasuries and stocks have rallied since S&P’s stripped the nation of its AAA grade in 2011.
Ten-year Treasury yields are down from 2.56 percent when S&P cut the U.S. one step to AA+ on Aug. 5, 2011. The yield was at 1.72 percent yesterday and fell to 1.379 percent on July 25, the lowest on record. The S&P 500 Index has jumped 21 percent, since that U.S. rating cut.
The yield on France’s 10-year government bond fell to 2.211 percent yesterday from 3.075 on Jan. 13, when the country was cut by S&P to AA+ from AAA.
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