The uncertainty on whether Spain will ask for a bailout has hung over the market in the last couple of months. If Spain asks for a bailout, it ironically may rally the EUR as the market heaves a sigh of relief that this uncertainty is removed. It will also validate European Central Bank (ECB) President Mario Draghi’s vow to do whatever it takes to ensure continuity of the EUR. The market will see this as ‘positive’ news and will lend support to the EUR.
Standard & Poor (S&P) downgraded Spain’s credit rating to BBB-, which is only one notch above junk status. S&P is a ratings agency for credit worthiness of an obligator with respect to a particular debt security or other financial obligation. Thus, this recent cut by S&P on Spain’s credit rating simply means that they assessed Spain will have problems fulfilling obligations to pay back investors who invested in government issued bonds. The next level after BBB- will be BB, B, CCC, CC or C. These are considered low credit quality (non-investment grade) or commonly known as ‘junk bonds’.
As an aside, Spain has about EUR20 billion worth of bonds maturing by the end of October. If Spain is unable to convince investors to reinvest their proceeds, they will likely have no choice but to ask for help via the European Stability Mechanism (ESM) and Outright Monetary Transactions (OMT).
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