Spanish downgrade threat averted, but for how long?

October 22, 2012

Moody’s refrained from cutting Spain’s sovereign rating to junk territory last week, easing immediate fears that Spanish bonds could become vulnerable to forced selling if they fell out of benchmark indices, tracked by bond funds, as a result of the grade reduction.

But that risk still looms large.

Moody’s kept Spain’s rating at Baa3 but assigned it a negative outlook, saying ”the risks to its baseline scenario are high and skewed to the downside.” It said it believed the combination of euro area and European Central Bank support, along with the Spanish government’s own efforts, should allow the government to maintain access to capital markets at reasonable rates.

But should certain factors lead the rating agency “to conclude that the Spanish government had either lost, or was very likely to lose, access to private markets, then Moody’s would most likely implement a downgrade, potentially of multiple notches.”

Standard & Poor’s also has Spain one notch above speculative grade at BBB-minus, with a negative outlook.

Below are the potential implications of a Spanish downgrade, if it were to materialize:

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