[peterhun]

Spain’s credit rating now stands at Standard and Poor’s lowest investment-grade level. Another cut and investors will be banned from holding Spanish bonds.

Standard & Poor’s has downgraded Spain’s credit rating two notches to the agency’s lowest investment-grade level.

S&P said it lowered its rating on debt issued by Spain from BBB+ to BBB-.

It also assigned a negative outlook to the rating, meaning it could be further downgraded.

S&P cited Spain’s economic recession, high unemployment and social unrest. It said those factors are limiting the government’s policy options. Spain’s economy is shrinking and its banks are struggling under the weight of a collapsed property market.

The European Central Bank has agreed to buy Spanish government bonds to help lower borrowing costs. But the government first needs to apply for a bailout.

The move by Standard & Poor’s leaves Spain’s rating on the cusp of junk status. S&P also assigned a negative outlook to the rating, saying it could be further downgraded if Spain’s economic conditions erode further.

“Overall, against the backdrop of a deepening economic recession, we believe that the government’s resolve will be repeatedly tested by domestic constituencies that are being adversely affected by its policies,” S&P said.

It also cited difficulty in predicting the extent to which other countries in the 17-nation eurozone would come to Spain’s aid. It had previously assumed a key European bailout fund would help recapitalise the country’s shaky banks without piling more debt on the central government in Madrid, but now any recapitalisation plan is likely to add more debt, S&P said.

Investors are worried that Spanish banks could collapse under the weight of an imploding property market.

Tensions between Spain’s indebted regional governments and the central government were also cited by S&P for its downgrade. S&P estimates Spain’s economy will contract by 1.8% this year and another 1.4% next year. Spanish unemployment is near 25%.

http://www.standard.co.uk/panewsfeeds/spain-credit-rating-cut-two-notches-8206156.html

[logan]

Most media are reporting Spain will request a bailout this weekend after the EU summit meeting this week.
Germany has returned to the hard ball game.
http://www.telegraph.co.uk/finance/financialcrisis/9613384/Germany-shocks-EU-with-fiscal-overlord-demand.html

Quote:
However, Berlin has softened its line on a rescue for Spain, suggesting that Madrid may be able to tap a precautionary credit line with “limited conditionality”, instead of forcing it to accept an EU-IMF Troika regime.

If that’s true Germany has blinked first and Rajoy’s stand off strategy of “Spain does not need a bailout” has worked at least for now. He can be sure of one thing however the Germans will not forgive him. 🙁

[Igurisu]

I find this from the bottom of the article a little concerning

The Bundesbank has also accepted €750bn in claims from EMU peers under the ECB’s internal Target2 payment system. These claims rotate risk from banks to the German taxpayer. “The Bundesbank’s Target2 balances need to be evaluated carefully. They do represent a real German exposure towards the periphery: they cannot be dismissed as mere accounting entries,” said Mr Pill, who helped create the Target2 system.

It is precisely for this reason that Swiss rating agency I-CV stripped Germany of its AAA rating last month. “Germany has taken on contingent liabilities of €2 trillion. When you create these backstops, the money comes from somewhere and it can all go wrong,” said I-CV’s Rene Hermann.

If I was a German resident and taxpayer i’d be digging my heels in about bailing out other countries when the result is a possible downgrading of the Euro’s strongest economy.

[logan]

Debt mutalisation across the eurozone is a red line for Germany from which they have said they will not cross. However they may well be forced into it by a simple choice of that or a break up of the entire pack of cards.
For me that cannot come soon enough. Returning to national currencies would in my opinion see the recession end within a year. Bring it on.

[Igurisu]

I agree entirely with your comment Logan. The bottom line is that the Euro cannot work without political union in addition to fiscal union.

Most of the eurozone countries want the benefits of the euro without giving up any fiscal or political clout to Brussels. For this reason its an ongoing game of dancing around each other and political manouvering.

Returning to national curencies ends this, and possible debt burdens on Germany would expedite the process.

[peterhun]

Returning to national currencies would in my opinion see the recession end within a year.

I think you are being massively optimistic. The problem is the level of debt, break up the euro and the currency swing will make the debt levels grow for the most vulnerable countries.

They will not let it happen, get ready for 10 more years of recession and possibly hyperinflation. The next potential governor of the Bank of England is talking about creating hyper-inflation on purpose.

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