Any request by Spain for a full sovereign bailout is unlikely to directly affect the nation’s credit rating as any aid may help the country continue fiscal reforms, Standard & Poor's said.
A request would “constitute an official acknowledgment that the government is facing ongoing risks to financing itself in the capital markets at sustainable rates,” the ratings company said in a statement in Frankfurt today. “However, we think that the potentially advantageous terms” could “enhance the chances of success of Spain’s already ambitious and politically challenging fiscal and economic reform agenda.”
Prime Minister Mariano Rajoy is considering requesting more aid from European rescue funds to help lower the nation’s borrowing costs. Spain has urged unlimited support from the European Central Bank after ECB President Mario Draghi announced proposals earlier this month to re-enter the bond market.
Spain is rated BBB+ at S&P, three levels above non- investment grade. It has a BBB rating at Fitch Ratings -- two levels above junk, while its Baa3 grade at Moody’s Investors Service is the lowest investment grade rating.
The yield on Spain’s 10-year benchmark bond was at 6.27 percent today, after reaching a euro-era high of 7.75 percent on Aug. 25.
Spain signed off last month on as much as 100 billion euros ($125 billion) of aid from European rescue funds to shore up banks burdened with bad loans. S&P said today that implementation of plans to set up a European banking union and allowing the ECB to buy bonds on the secondary market “would provide the Spanish authorities with time to put additional economic and fiscal reforms in place that would be conducive to restoring investor confidence.”
Still, it added that “uncertainties remain” at both the European and national level, including tensions between Spain’s government and regional governments on budget targets.
“Labor reforms instituted so far, while substantial, have not been sufficient to fully address the structural problems of the Spanish labor market,” S&P also said.
S&P said the consolidation of Europe’s monetary and political union would help Spain, while an exit by Greece from the euro would hurt its credit rating.
“A euro-zone exit by any member sovereign would implicitly reintroduce currency risk in cross-border financial transactions,” S&P said. An exit also risks “permanently jeopardizing the ability of the Spanish public and private sectors to access financing at sustainable rates.”
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