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Spanish bonds escape the axe

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17/10/2012
After weeks of speculation, Moody’s has opted not to reduce Spain’s credit rating to junk bond status, although the agency assigned a negative outlook due to the high downside risks.

Specifically, Moody’s confirmed Spain’s government bond rating at “Baa3”, the lowest level of investment grade.

To justify the rationale in maintaining the rating, Moody’s points to a decrease in the possibility that the country will lose access to the financial markets after the European Central Bank’s (ECB) announcement of government bond purchases, Madrid’s commitment to fiscal and structural reform measures, and ongoing progress in the restructuring of the Spanish banking sector.

However, Moody’s warns that the future does not look bright by assigning a negative outlook. The credit rating agency notes that “the risks to its baseline scenario are high and skewed to the downside.”

Among the threats is a possible “lack of progress” in getting the country’s financing back on a stable footing. The Eurozone is also being watched and could have negative repercussions: “for example, in the absence of concrete progress in reforming the euro area’s fiscal, economic and regulatory institutions.”

In particular, Moody’s notes that a possible Greek exit from the euro “continues to constitute a major event risk for all the weaker euro area member states.”

The agency concludes by warning that if any of the above scenarios materialise, it would “most likely implement a downgrade, potentially of multiple notches.”

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