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Spain On The Brink Of A Downgrade To Junk

The Baa3 long term debt rating of the Spanish government remains on review for possible downgrade. The review commenced on 13 June 2012 and will likely continue through the end of September because of pending information on:
(1) the scope of the bank recapitalisation needs;
(2) the nature and size of support mechanisms available under the European Stability Mechanism (ESM) in light the upcoming German Constitutional court ruling; and
(3) potential changes and additions to the existing crisis-management framework as policymakers reconvene in the next few weeks to discuss policy options in a number of areas, including the further advancement of a banking union.

--Moody’s, Aug. 30th, 2012

Moody’s said in August that it would conclude its review of Spain’s near-junk rating by the end of September, which I guess means the end of this week. They now have answers to all three open questions listed above, so they need to decide.

Moody’s must decide whether (in its opinion) Spanish government bonds are suitable as an investment for fiduciaries, or should instead be viewed as a speculative investment unsuitable for widows and orphans. An end of the review with a confirmation at Baa3 would seem to be out of the question. Either they will extend yet further the review (punt), or take the rating to Ba1 or Ba2.

While an opinion about the future can await additional information, it is at risk of becoming journalism rather than opinion. Moody’s could wait forever to decide the review but that wouldn't be very helpful to investors.