My first reaction was surprise when Standard & Poor’s (S&P) Rating Services announced ratings on Spain’s sovereign debt “would likely not be directly affected” if its government requested a full bailout.
While I view an eventual request for the bailout through the European Financial Stability Facility, the European Stability Mechanism, or the International Monetary Fund as good news for Spain in particular, and financial markets in general, rating agencies typically downgrade countries that ask for help. Asking for a bailout is an acknowledgement that a nation questions its ability to finance itself indefinitely, either because borrowing costs are too high or it owes too much.
S&P’s announcement that it won’t punish Spain with a downgrade if it asks for aid speaks volumes about how strong the rating agency believes the benefits of the bailout program would be. It also demonstrates that in its latest round of policy initiatives, the European Central Bank (ECB) and other official creditors have finally dealt with the seniority issue of official creditors; by removing seniority, other (private) creditors get fair treatment, mitigating some of the additional risk of owning effectively subordinated Spanish bonds.
In its announcement, S&P cited the favorable terms Spain could receive, ensuring debt sustainability, while the country attempts to overcome its fiscal and economic woes. If Spain sticks to the program’s conditions, it could restore investor confidence throughout the term of the bailout program. To do so, Spain needs to continue reforms aimed at rebalancing its economy, boosting its competitiveness and employment and aiding its banks, all of which would help stem its swiftly rising debt levels and stimulate growth.
S&P’s announcement did not come without caveats: Spain can still get downgraded. S&P maintains its negative outlook on Spain’s sovereign debt and will closely monitor the progress of the reforms. S&P also cited as complicating factors political concerns among European policymakers as well as between Spain’s central and regional governments and the possibility of a member exit. Regardless, this announcement reveals that in the view of a major rating agency, a full bailout for Spain would be a favorable development.
This announcement is also good news for banks and companies the market has feared would get an automatic downgrade upon the “solution” (bailout) for Spain. If there are no automatic downgrades, those banks and companies could avoid the higher financing costs, net outflows of wholesale deposits, more volatile equity markets and decreased consumer confidence.
I still worry that Spain will have to see the flames licking at its heels before it finally calls for help, but S&P’s announcement should help ease its concerns about asking for a bailout.