Thursday, August 23, 2012

Bailout request by Spain would not affect debt rating: S&P

MADRID: Ratings agency Standard & Poor's said Wednesday a full-blown bailout for Spain would likely not hurt its sovereign credit rating.

Speculation is rising that spiralling borrowing costs for Spain will force it to join Greece, Ireland and Portugal in seeking a full rescue from the eurozone's bailout funds or International Monetary Fund.

Spain has already snatched a 100-billion-euro ($124-billion) lifeline from its eurozone partners to salvage the nation's banks, buckling under record bad loans built up since a 2008 property crash.

But the nation faces big debt repayments due in October, and many investors and economists expect it to seek outside help before then, with 10-year yields on government bonds still well above six per cent a year.

Standard & Poor's cut Spain's sovereign debt rating in April by two notches to BBB+ and added a negative outlook, warning the government's budget situation would worsen as the Spanish economy contracts.

"The sovereign ratings on the Kingdom of Spain would likely not be directly affected should Spain's government request a bailout," Standard & Poor's said in a report.

"We note that so far Spain's government has not decided to request a full bailout, despite growing expectations that it could do so in September, when the conditions likely to be attached to a support program may have become clearer," it said.

If Spain seeks a full bailout, it would amount to an official acknowledgement of the risks it faces in financing itself in the markets at sustainable rates, the agency said.

"However, we think that the potentially advantageous terms Spain could receive under a full bailout could enhance the chances of success of Spain's already ambitious and politically challenging fiscal and economic reform agenda."

Resistance to Spain's tough reforms was likely to grow, however, as people's incomes declined and the labour market stayed weak, it said, with the unemployment rate already close to 25 per cent.

Action by Europe could help if it carries through proposals to allow the new bailout fund, the European Stability Mechanism (ESM), to buy bonds, inject money directly to banks and waive the right to be first in the queue for repayment in case of a debt default, the agency said.

The European Central Bank is also looking into the possibility of resuming the buying of sovereign bonds, Standard & Poor's said.

"We believe that the ECB is also reviewing its de facto preferred-creditor status, which had raised market concerns following Greece's recent sovereign debt restructuring," it added.

A longer-term European commitment to set up a banking union regulated by a single authority would also shore up confidence in Spain's financial sector, which had suffered corporate withdrawals, it said.

"Implementation of these proposals, in our view, could support the ratings on Spain, as it would provide the Spanish authorities with time to put additional economic and fiscal reforms in place that would be conducive to restoring investor confidence."

But the credit assessor said uncertainties lingered, such as the pending decision of the German Constitutional Court, due September 12, on the constitutionality of the framework of the ESM.


Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C
Senior Sales Director
DTZ Debenham Tie Leung (SEA) Pte Ltd (L3006301G)

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