By Jack Duffy

PARIS (MNI) – The climb in Spanish note and bond yields to euro-era
highs raises the risk that rating agencies will drop Spain’s credit
status into the “junk” category – a move which analysts say could cause
Madrid to lose its remaining market access.

Spain is currently rated Baa3 by Moody’s, its lowest investment
grade, and it is under review for a further downgrade. After Moody’s cut
the outlook for Germany, the Netherlands and Luxembourg, in part because
of the increased likelihood of bailouts in Spain or Italy, analysts say
Moody’s could cut Spain again at anytime.

“I suspect we’re not far away,” said Suki Mann, credit analyst at
Societe Generale. “There is enough information out there for them to do
right it now.”

Moody’s lowered Spain to Baa3 on June 13, in part because of its
“very limited financial market access.” Since then, Spain’s 10-year
yields have climbed from around 6.6% to 7.61%, while its two-year yields
have soared from roughly 4.5% to 6.66%.

Spain’s economy has continued to weaken and its debt position has
worsened because of the estimated E100 billion bank bailout and the
financial woes of its semi-autonomous regions – at least six of which
may apply to the central government for emergency aid, according to the
Spanish newspaper El Pais.

Gary Jenkins, managing director of the fixed-income consulting firm
Swordfish Research, described a further cut in Spain’s rating by Moody’s
as “imminent” because Spain’s market access at current yield levels is
“rapidly disappearing.”

Moody’s did not respond to repeated requests for comment regarding
the outlook for Spain.

A loss of its investment-grade credit rating would be further blow
to Madrid, as its government bonds would drop out of key European and
global bond indexes, causing a wave of selling by institutional
investors who align their holdings to the indexes.

A cut to junk by Moody’s would “would breed more fear and lead to
some front-running” by investors trying to get out of their Spanish bond
positions before another agency announces a downgrade, said Peter
Chatwell, interest rate strategist at Credit Agricole CIB.

Standard & Poor’s rates Spain BBB+, three notches above junk, with
a negative outlook. Fitch rates Spain at BBB, two levels above junk,
also with a negative outlook. Both agencies declined comment.

To be sure, Spanish banks are already taking up much of the
government’s new debt issuance, and a junk credit rating would be
unlikely to change that, analysts say. Spain has already raised the bulk
of its financing for the year, needing to borrow only another E27
billion or so by year-end to pay maturing debt and to finance deficits.

Beyond 2012, however, Spain faces a heavy schedule of debt
redemptions and interest payments amounting to E116 billion in 2013 and
E87 billion in 2014, according to Rabobank.

With a junk credit rating, analysts say it is unlikely Madrid could
meet such redemptions without a full bailout.

“It’s getting pretty close,” said Lyn Graham-Taylor, a fixed income
strategist at Rabobank in London. “The economic figures are getting
worse, the bank bailout is worsening the debt and the market is losing
patience.”

–Paris newsroom, +33142715540; jduffy@marketnews.com

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