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Standard & Poor: Spain's debt rating one level above junk

By Catholic Online (NEWS CONSORTIUM)
October 12th, 2012
Catholic Online (www.catholic.org)

Standard & Poor has cut Spain's debt rating to one level above junk. Spain was lowered two levels to BBB- from BBB+, S&P said in a statement. S&P assigned a negative outlook to the nation's long-term rating and lowered the short-term sovereign level to A-3 from A-2.

LOS ANGELES, CA (Catholic Online) - The rating cut was wholly unexpected and is expected to have negative repercussions for Spain, Ignacio Fernandez-Palomero Morales, the deputy head of the nation's Treasury says. Speaking at a conference in Tokyo, Fernandez-Palomero said the downgrade was based on a lack of clarity in the resolution plan for the debt crisis.

In response, investors are shunning Spanish securities as Prime Minister Mariano Rajoy weighs a second bailout amid a deepening recession. The prime minister has held off on a decision about whether to request European Central Bank and EU bond buying to lower borrowing costs. He's called for more details on what would be demanded of Spain in return for the support.

The downgrade comes after Spain announced a fifth austerity package in less than a year. Spanish credit concerns have grown since the government requested as much as $129 billion in U.S. dollars in European Union aid last June to shore up its lenders and amid signals that the deficit target is in jeopardy.

S&P said the government's action will probably be constrained by "a policy-setting framework among the euro-zone governments that still lacks predictability."

The European Stability Mechanism's involvement in bank recapitalizations put into question the mutualization of loans to Spanish banks among euro-region nations. That possibility was a key factor in S&P's decision to affirm ratings on Spain on August 1 as it would enable Spanish net general government debt to remain under 80 percent of gross domestic product beyond 2015, it said.

The yield on Spain's 10-year benchmark bond jumped as much as 12 basis points to 5.93 percent today before dropping to 5.80 percent in Madrid, compared with a record of 7.75 percent on July 25, a day after Spain signed a memorandum of understanding awarding it a credit line for its banks.

AAA-rated countries Germany, the Netherlands and Finland had been issued a joint statement on September 25 saying the ESM should only be used to recapitalize banks as a last resort.

Spanish Economy Minister Luis de Guindos after meeting with peers in Luxembourg told journalists that the issue of those legacy assets hadn't been discussed.

German Finance Minister Wolfgang Schaeuble denounced the debate a "phantom" and said a transfer of legacy bailouts isn't compatible with firewall-fund agreements.

Deputy Economy Minister Fernando Jimenez Latorre told reporters that he expects an intervention on secondary markets may take place shortly. Spain still requires information before it can make a decision.

"One can expect that one way or the other, the mechanism of intervention on secondary markets starts to act relatively soon," Latorre said. "If the ECB itself considers there are inefficiencies in the transmission of monetary policy and that there are doubts on the irreversibility of the euro project, it is logical to think that European institutions will take the necessary measures shortly to dissipate those doubts."

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