Spain?s credit rating was last slashed on February 13 by one of the top three ratings agencies, Moody?s, which lowered its rating of the solvency of Spanish sovereign debt by two rungs from A1 to A3. The company mentioned Spain?s 8.51% debt/GDP ratio and anticipations of slow growth expected for the next year as the primary reasons for their decision. It emulated decisions made by Standard & Poor?s and Fitch on February 13 and January 27, respectively.
After Spain?s rating was cut, the ratings agencies were too critical of Spanish companies and subsequently have decided to be more indulgent to the Ibex 35. By way of comparison, ratings companies have lowered the Ibex 35 by 1.5 grades and Spanish sovereign debt by 2 grades. In other words, Spanish companies look more solvent than the Spanish state.
Although each agency uses its own criteria and scale to calibrate the creditworthiness of a country or company?s debt, the major traits that all use is based primarily on the capacity and intention of the debt issuer to meet its financial obligations and what protection it has against a possible default and other causes that could put creditors in danger.
Generally, within any given country, sovereign debt is higher quality than corporate debt. That trend exists because a national government has better tools for meeting financial obligations compared to private companies. For example, a government can get funds through raising taxes, monetizing its debt by printing bills. But there are countries in which private companies fare better than national governments. Right now, Spain is one of them.
