Spain Long-Term Debt Lowered to BBB+ from A, With Negative Outlook; 100% Certain Conditions in Spain Worsen

Why Spanish debt was Rated "A" for as long as it has been remains a mystery. Indeed BBB+ seems like a gift. Nonetheless, expect howls from Europe as Spain Cut by S&P for 2nd Time This Year on Banks, Economy.

Spain's sovereign credit rating was cut for the second time this year by Standard & Poor's on concern that the country will have to provide further fiscal support to banks as the economy contracts.

S&P lowered the long-term grade to BBB+ from A, with a negative outlook. Spain?s short-term rating was reduced to A-2 from A-1, New York-based S&P said in a statement yesterday.

?Spain?s budget trajectory will likely deteriorate against a background of economic contraction,? S&P wrote in the statement yesterday. ?At the same time, we see an increasing likelihood that Spain?s government will need to provide further fiscal support to the banking sector. As a consequence, we believe there are heightened risks that Spain?s net general govern debt could rise further.?

?We could also consider a downgrade if political support for the current reform agenda were to wane,? the S&P statement said. ?Moreover, we could lower the ratings if we see that Spain?s external position worsens or its competitiveness does not continue to approach that of its trading partners, a key factor for Spain to return to sustainable economic and employment growth.?

100% Certain Conditions in Spain Worsen

One has to wonder what the S&P is smoking with that last statement. The odds Spain's position worsens is 100% and the odds Spain's competitiveness rises to match productivity in Northern Europe is close to 0%.

The article continues ...

Spanish banks probably need 50 billion euros of additional capital, Morgan Stanley analysts estimate. The figure may rise to as much as 160 billion euros in a worst-case scenario, said Elaine Lin, a strategist at Morgan Stanley in London. The banks could try to raise the capital themselves or get it from either the Spanish government or the European Financial Stability Facility, she said.

How Much?

I propose the worst case scenario is likely to soon become the best case scenario. Spain is imploding and nothing can stop it but free money from Germany (not going to happen voluntarily), or a Spanish exit from the Eurozone. The latter is likely, but may not occur until Spain becomes the next Greece.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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