Moody’s Spain downgrade threat not a major shock – Fund manager

Moody’s threat to downgrade Spain’s rating should not be perceived as another major shock, a fund manager said on Friday. But he warned that politicians will have to be more convincing about their efforts to resolve the crisis.

The rating agency put Spain on review for a possible downgrade on Friday, adding to concerns that the Greek rescue package approved the previous week by European leaders had not done enough to halt the spread of the crisis.

Moody’s cited continued funding pressures facing the Spanish government, concerns over growth and the precedent created by the Greek bailout as reasons for reviewing the country’s Aa2 classification. It was also concerned about the continued fiscal slippage among some regional governments.

“This is clearly not a positive development in terms of sentiment. Having said that, Spanish bank share prices are not underperforming the broader European banks sector and Spanish bond spread widening has not changed dramatically, implying that this move does not amount to a material incremental shock,” said Luke Stellini, product director, European equities at Invesco Perpetual.
       
Analysts said Spain funding costs remain too high in spite of the measures adopted to curb the Greek crisis and that more growth was needed, though the rescue package was generally welcomed.

“We believe that policy makers did produce a substantive and aggressive set of policies. However, markets have not been convinced because questions remain about the timing and implementation of the new initiatives, and because of the size of funds set aside to cover the risks around Spain and Italy combined,” Stellini said.

Spain is capable of independently navigating its way to sustainability and is making good progress in that direction, he said. The current funding commitments via the European Financial Stability Facility (EFSF) are sufficient for Spain, should they be required.

“The reality however is that markets need to be convinced further and it is down to eurozone politicians to provide this reassurance.”

The specter of a possible US default was exacerbating the crisis, he said. “Resolution of this last issue would remove some of the emotion in the market and allow a more fundamental assessment of events in Europe, which we feel took a fundamental and substantive move forward last week.”

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