In January, Spain terminated its contract with S&P (tired of paying for being knocked done by the ratings agency). S&P then replaced its management team in Spain and now, in March, of its own accord, – because Spain did not ask for the qualification – decided, last Friday, to raise its credit rating on the country by one step, to A- from BBB+, with a “positive” outlook. Just a coincidence?
The fact a contract is ended does not stop the ratings agencies from continuing to issue evaluations, as Fitch did in January. S&P has raised its rating based on the improving economy, despite the tension in Catalonia, which apparently is now “not an obstacle to economic growth and the budget results.” S&P also expects Spain GDP to grow above average in the coming years and the public accounts to continue to consolidate.
According to Bankinter, S&P probably wanted to wait and see what the consequences of the separatist conflict in Catalonia would be for the fiscal deficit and growth before making its decision.
We assigned a 60% probability to this improved rating and we believe that it was partly discounted by the market. So the narrowing of Spain’s risk premium could be around 10 bp, to about 65 bp, equivalent to a yield on the 10-year bond of below 1.20%.
After this improvement, there are now three ratings agencies – Fitch, DBRS and S&P itself – which have placed Spain in the higher solvency group. The Spain-Germany risk premium is around 75 bp, at eight-year lows, and 40 bp below the risk premium at end-December.
For Link Securities, the improved credit rating for Spain should mean lower financing costs not just for the State but also for companies, contributing to the good performance of Spain’s economy.
Whatsmore, it will allow more institutions to invest in the country’s debt, as the limitations with respect to the rating are reduced.
