The credit rating agency Moody’s slashed Spain’s credit rating to just one notch before the dreaded ‘junk’ status causing many observers to claim that the prime ministers decision to beg for a bailout has backfired spectacularly. The yield benchmark on the countries 10-year bonds hit 7% this morning which many believe is unsustainable. The bailout was hoped to calm the financial markets fears over Spain’s spiraling debt but has instead piled on further pressure.
Moodys gave it reasons for the downgrade stating: “The decision to downgrade the Kingdom of Spain’s rating reflects the following key factors: The Spanish government intends to borrow up to EUR100 billion from the European Financial Stability Facility (EFSF) or from its successor, the European Stability Mechanism (ESM), to recapitalise its banking system. This will further increase the country’s debt burden, which has risen dramatically since the onset of the financial crisis.
The Spanish government has very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalisation funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from the ECB.
The Spanish economy’s continued weakness makes the government’s weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years.”
Moody’s cut Spain’s rating from A3 to Baa3 and warned that it could reduce it further over the next three months.
“The risk of losing investment grade pressured the differential this morning and left it at historic highs,” analysts at Spanish brokerage Renta 4 said in a market report.
Contagion appears to spreading through the Eurozone as Cyprus has also been downgraded and concerns increase daily over the state of Italy. Despite concerns emanating from Spain the Euro made some gains against the pound and US dollar as optimism grows that Greece will remain a member of the Eurozone.
Meanwhile calls for a closer fiscal and political union have gotten louder with rumours surfacing that the Germans are preparing to soften its stance. It is clear that if the members of the Eurozone do not come up with some sort of plan to stop the spread of the sickness engulfing it then the single currency will be doomed in a matter of weeks. Investors have lost all faith in bailouts.
Jose Garcia Margallo, Spain’s foreign minister, has said it would be a catastrophe if Spain “left Europe”. He has called on the European central bank to ease market tension adding that Germany should have taken a longer view of the crisis.
“If they throw one country to the wolves that will affect everyone, so they should have longer-term vision.”
The Pound to Euro exchange rate is currently trading at 1.236
The Pound to US Dollar exchange rate is currently trading at 1.551
The Euro to Australian Dollar exchange rate is currently trading at 1.263
The Euro to US Dollar exchange rate is currently trading at 1.255
The Euro to Pound exchange rate is currently trading at 0.808
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