Spanish spectres in the market | FT Alphaville

Spanish spectres in the market

You know that when the market rumours of sovereign downgrades have started up again, the crisis really is back to bother Europe.

First on Tuesday — Spanish business daily Expansión reports that the market is expecting Moody’s to downgrade Spain below AAA this week — when it concludes the review it announced back in June. The rating agency has had Spain on AAA since 2001, but both Fitch and Standard & Poor’s have already cut the country to AA.

A Moody’s downgrade would be interesting timing — Spain’s government has only just issued its ‘austerity’ budget for 2011, which was reasonably tough, but perhaps over-optimistic on its growth projections, as the FT noted.

Still, according to Expansión (Google translated from the Spanish):

… the agency is meeting to assess the Spanish situation on Thursday, precisely the day when the budget will be presented in El Congreso [the Spanish parliament’s lower house]…

Sources consulted by this newspaper say that there are many more pros than against for a hypothetical withdrawal of the triple A from the national debt. Along the same line are analysts polled by Reuters, which also predict a reduction from the current current Aaa to Aa1…

Two other points to note, by the way — this may be just us, but Moody’s does appear to have been pretty strict with Europe’s periphery recently: the agency downgraded both Ireland and Portugal back in July, while it warned on Spain in June.

It’s not really that shocking if Spain does indeed lose its last AAA– but it would be an unwelcome reminder that though Spain has dropped out of the market’s focus somewhat, it hasn’t quite reached escape velocity from its erstwhile PIIGS peripheral peers. And at the worst possible time.

After all, while the 10-year Spanish bond-bund spread is off its wides, it’s certainly skating on thin ice:

And this isn’t the only sovereign downgrade rumour floating around — Belgium is a dark-horse candidate, thanks to recent government instability.

Related links:
Ireland, Portugal market-implied ratings take a tumble – FT Alphaville
The once and future sovereign crisis – FT Alphaville