26th Oct 2021

Spain downgraded amid talk of bail-out-lite

  • Spain may need up to €100bn for its banks (Photo: Valentina Pop)

The Fitch ratings agency on Thursday (7 June) downgraded Spain to close to bail-out territory due to its banking troubles, uncertainty surrounding Greece and "policy missteps at European level."

Fitch cut the Spanish rating by three notches to "BBB," just one level above so-called non-investment grade status which indicates a high risk of default.

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The New York-based agency said the downgrade came as the cost of rescuing Spain's troubled banks is now estimated at between €60-€100 billion, compared to previous estimates of €30 billion. With recession, a high level of debt and contagion from Greece adding to the mix, Spain is likely to see further downgrades, Fitch says.

The agency also blamed the brinkmanship of EU leaders in dealing with the crisis.

"The dramatic erosion of Spain's sovereign credit profile and ratings over the last year in part reflects policy missteps at the European level that in Fitch's opinion have aggravated the economic and financial challenges facing Spain as it seeks to rebalance and restructure the economy," it said.

It added that the absence of a "credible vision" for reforming the eurozone and of bail-out funds large enough to protect Spain from market speculation contributed to worsening Madrid's standing.

Its downgrade includes expectations that Spain will ultimately receive financial support to recapitalise its banks, "though not necessarily a full-fledged policy-conditional external funding programme."

EUobserver understands that a eurozone deal likely to be agreed will have the Luxembourg-based European Financial Stability Facility - a temporary bail-out fund worth €440 billion in loan guarantees - channels bonds to a government-owned bank rescue fund in Spain.

The same move, to the tune of €48 billion, was carried out last month for Greek banks.

But unlike Greece, Spain would not receive a full-blown bail-out involving IMF involvement and troika inspectors to supervise reform implementation,

Madrid's bail-out-lite is expected to be announced in the coming weeks, once its funding needs are officially confirmed by the International Monetary Fund and two independent audits.

So far, Spain can still borrow from markets, as proven on Thursday in a closely-watched bond auction worth €2.1 billion. The auction saw strong demand, even though the interest rate (6%) was higher compared to two months ago (5.7%).

With Spain the fourth-largest economy in the eurozone, leaders are framing Madrid's problems as a make-or-break moment for the eurozone.

"We are in a real stress moment ... [we are] going through crucial weeks both for the EU and the single currency," Luxembourg Prime Minister Jean-Claude Juncker said in Brussels on Thursday during a press conference.

"These are crucial days and weeks," he added.

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