New fears for Spain? At the close of the trading day on Wall Street last Thursday, the rating agency Standard & Poor's planned to attack Spain's creditworthiness by lowering their credit rating. The grade of long-term Spanish debt dropped another rung from AA to AA-, with a negative outlook.
It is the second rating cut endured by Spain in just one week and the third attack if we count the blows that S&P and Fitch gave to lenders recently. Still, calm has returned to the markets thanks to the European Central Bank's intervention, which has acted as a true firewall to keep back doubt.
Within the first hour of trading on Friday, yields on Spanish 10-year bonds rose from 5.18 to nearly 5.28. This rally was stymied by 10:00am. Experts note that the ECB's decision to buy Spanish and Italian bonds on the secondary market successfully contained the risk premium.
In fact, the differential with the German 10-year bond showed a small increase early in the morning, but afterward pared back and closed at 304 basis points, seven points below the previous day. This has nothing to do with spikes that other countries are seeing: Greece (from 2,093 to 2,234), Portugal (917 to 945) and Ireland (577 to 591).
Stock markets are also calming down. The Ibex 35 was flat for the entire day and closed with gains of 0.36%. This activity is starkly different than the convulsions that March rating cuts caused. At that time the Spanish index fell 1.17%. Director of the Economía del Círculo de Empresarios, Gregorio Izquierdo, said that this time it is predicted that Moody's will give a negative outlook for Spain as it did this past July 29.
According to Izquierdo, despite the fact that markets have already discounted Spain's risk premiums incrementally, the changes are moderate and do not rigorously reflect the challenges faced by the Spanish economy, and the lowered rating will make treasuries more expensive and increase interest rates paid to financial lenders. Lower yields and slower growth will plague the country as a result.
