Moody's leaves Spain sovereign rating at investment grade

NEW YORK/MADRID Wed Oct 17, 2012 2:36am BST

A Spanish flag flutters in the wind in central Madrid September 24, 2012. REUTERS/Andrea Comas

A Spanish flag flutters in the wind in central Madrid September 24, 2012.

Credit: Reuters/Andrea Comas

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NEW YORK/MADRID (Reuters) - Spain's government dodged a bullet on Tuesday when Moody's Investors Service affirmed its investment grade rating, assuaging widespread fears that the euro zone country would be cut to a junk rating.

Moody's kept a Baa3 rating but assigned a negative outlook, leaving both the rating and the outlook in line with that of rival agency Standard & Poor's, which rates Spain at BBB-minus. Fitch Ratings' grade for Spain remains one notch higher at BBB but also with a negative outlook.

Spain has been ready to ask for euro zone help since the beginning of the month, European officials have told Reuters, with the most likely method being a precautionary credit line of around 50 billion euros ($64.7 billion) triggering a potentially unlimited bond-buying programme from the European Central Bank.

But German reluctance to sign off on another bailout for a troubled euro zone country - the second for Spain after it obtained a 100-billion-euro credit line for its banks in June - has delayed a request.

A German official told Reuters on Tuesday it was not clear when Spain would ask, but said aides were laying the groundwork for such a move.

Moody's said in a statement it believed that "the combination of euro area and ECB support and the Spanish government's own efforts should allow the government to maintain capital market access at reasonable rates, providing it with the time it needs to stabilise public debt over the next few years."

"Specifically, Moody's believes that the government will likely ask for an Enhanced Conditions Credit Line (ECCL) from the ESM (European Stability Mechanism) as a prerequisite for the ECB activating its OMT program in relation to Spanish government debt," Moody's said referring to the ECB's new bond purchasing program.

Moody's believes the ECB's willingness to help with bond buying, reducing the volatility in Spanish government bond yields, will cut the risk that Madrid loses access to the market for its sovereign debt, at least for the foreseeable future.

Keeping access to debt markets for sovereign funding needs is key, a Moody's analyst told Reuters on Tuesday.

"A full program along those lines where basically the official sector provides exclusively the funding for all your requirements, that in our view is not compatible with an investment grade, and that would apply in all the cases," said Kathrin Muehlbronner, a senior analyst with Moody's Investors Service.

If Spain were to lose market access, that would not be compatible with a Baa3 rating, she confirmed.

SUMMIT

The Moody's decision removes the most immediate threat to Spain but also keeps the pressure on the country to move ahead with a request if it wants to maintain its investment grade status.

Spanish officials say Prime Minister Mariano Rajoy has not made a final decision on a bailout request because he still wants to discuss with the ECB some details of the plan.

Spain also wants to make sure its euro zone peers won't be asking for additional demands on economic reforms once it has made the request.

The matter will be discussed at a European summit in Brussels on Thursday and Friday and possibly at a separate summit of the 17 euro zone leaders after the main meeting, some officials said.

Once a request is made, the country still has to negotiate the conditions attached to the loan with the euro zone and sign a memorandum of understanding.

Prior to the announcement, yields on Spanish 10-year sovereign bonds edged up to 5.792 percent on Tuesday, well within recent ranges. Analysts expect those yields to remain rangebound for as long as uncertainty persists over when Spain will seek financial aid.

The euro jumped against the U.S. dollar on Moody's affirmation, rising approximately 0.30 percent to trade in thin volumes at $1.3092, its highest level since mid-September. It has since extended those gains.

In New York trade, the euro had already rallied to a one-week high on the greenback as media reports indicated Germany was open to a precautionary line of credit for Spain as well as tentative signs of improving confidence in Germany's economy.

(Additional reporting by Luciana Lopez and Caryn Trokie; Editing by Clive McKeef)

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