Spain seems to have survived the most recent scrutiny by ratings agencies Moody’s and Standard & Poor’s. Last week, S&P hit Spain with a two-notch downgrade, but still kept them at investment grade…just barely though. Then this week, Moody’s confirmed Spain’s government bond rating at Baa3. This concluded a review for a possible downgrade that began back in June.
When moving Spain from BBB+ to BBB-, S&P focused on five factors: Spain’s delay in asking for ESM assistance, a deepening recession, Germany’s recent comments that any direct bank recapitalization by the ESM once the banking union is set up should exclude “legacy assets,” a deteriorating political climate, and likely fiscal slippage. Moody’s decision to confirm the Baa3 rating was based on three stated factors: a probable request for a precautionary credit line from the ESM (they viewed this as a positive), the government’s commitment to fiscal and structural reforms, and progress towards recapitalizing the banks.