Spain's government dodged a bullet on Tuesday when Moody's Investors Service affirmed its investment grade, assuaging widespread fears that the eurozone country would be cut to a junk rating.
Moody's kept a Baa3 rating but assigned a negative outlook, leaving both the rating and the outlook in line with that of rival agency Standard & Poor's, which rates Spain at BBB-minus. Fitch Ratings grade for Spain remains one notch higher at BBB but also with a negative outlook.
"Moody's believes that the combination of euro area and ECB support and the Spanish government's own efforts should allow the government to maintain capital market access at reasonable rates, providing it with the time it needs to stabilise public debt over the next few years," Moody's said in a statement.
Indications in recent weeks that Spain is approaching the point of formally asking for aid from the European Union, would potentially allow the European Central Bank to step in and buy its bonds.
Spain has been ready to ask for euro zone help since the beginning of the month, officials have told Reuters, with the most likely method being a precautionary credit line of around 50 billion euros ($64.7 billion).
"Specifically, Moody's believes that the government will likely ask for an Enhanced Conditions Credit Line (ECCL) from the ESM (European Stability Mechanism) as a prerequisite for the ECB activating its OMT program in relation to Spanish government debt," Moody's said.
Moody's believes the ECB's willingness to help with bond buying, reducing the volatility in Spanish government bond yields will cut the risk that Madrid loses access to the market for its sovereign debt, at least for the foreseeable future.
Prior to the announcement, yields on Spanish 10-year sovereign bonds edged up to 5.792 percent on Tuesday, well within recent ranges. Analysts expect those yields to remain rangebound for as long as uncertainty persists over when Spain will seek financial aid.
The euro jumped higher against the U.S. dollar on the news, rising approximately 0.30 percent on word of the announcement to trade in thin volumes at $1.3092, its highest level since mid-September.
In New York trade, the euro had already rallied to a one-week high on the greenback as media reports indicated Germany was open to a precautionary line of credit for Spain as well as tentative signs of improving confidence in Germany's economy.
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