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The Two-Way
12:25 pm
Thu June 7, 2012

Fitch Downgrades Spain's Sovereign Debt Three Notches To BBB

Facing a banking a crisis, the ratings agency Fitch threw another curveball at Spain, today, downgrading its sovereign debt rating three notches to BBB. That is, according to The Guardian, just two notches above junk status. The Wall Street Journal says it's one notch above junk status.

Fitch also assigned a negative outlook to Spain, which signals further cuts could loom.

Fitch estimated that Spain will need anywhere from 60 billion euros to 100 billion euros to recapitalize the country's banking center. Fitch previously estimated the country would need about 30 billion euros.

In announcing its downgrade Fitch explained Spain's tough situation:

"The dramatic erosion of Spain's sovereign credit profile and ratings over the last year in part reflects policy missteps at the European level that in Fitch's opinion have aggravated the economic and financial challenges facing Spain as it seeks to rebalance and restructure the economy. The intensification of the eurozone crisis in the latter half of last year pushed the region and Spain back into recession, exacerbating concerns over sovereign and bank solvency. The absence of a credible vision of a reformed EMU and financial 'firewall' has rendered Spain and other so-called peripheral nations vulnerable to capital flight and undercut their access to affordable fiscal funding. Spain has been especially vulnerable to a worsening of the eurozone crisis because of the high level of net foreign indebtedness (around 90% of GDP) and fragile confidence in its capacity to implement fiscal consolidation and bank restructuring in a timely fashion."

Just to keep all of this in perspective, Reuters reports today that a report due out on Monday from the International Monetary Fund is expected to show that Spain needs at least 40 billion euros to recapitalize its banks. El País reports that Standard & Poor's calculates the country will need anywhere from 80 billion euros to 112 billion euros.

At play, here, is whether Spain can borrow its way out of the crisis or whether it will have to turn to the European Union for a bailout.

Reuters adds:

"Despite the pressure on its banks, Spain managed to weather funding pressures in credit markets, raising all the money it required, although at a higher cost. Madrid sold 2.1-billion euros (US$2.6-billion) of government bonds, paying just over 6 percent for 10-year debt — up from 5.74% last month and the highest yield at an auction since 1998.

"The sale laid to rest — at least for now — fears raised by Treasury Minister Cristobal Montoro on Tuesday that Spain was being shut out of credit markets."

It's still unclear what effect this downgrade could have on Spain's ability to borrow.

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