Spain Downgrade Moves Bond Yields Higher; Chinese Stimulus Will Be Mild Says Officials

Egan Jones Ratings Co. recently downgraded Spain’s debt to B from BB- with a negative outlook . The downgrade moves Spanish debt into junk status.

However, the three major credit rating firms still rate Spain’s debt as investment grade. 

On May 17th Moody’s rating agency downgraded 16 Spanish banks, causing worry among investors about the severity of Spain’s banking problems.

Spain’s economy is roughly five times the size of Greece. There are growing concerns that Spain, unlike Greece, may be “too big to bail out” in the future.

Bankia Bailout

According to the Financial Times, the Spanish government will now have to come up with a different proposal to bail out Bankia because the European Central Bank (ECB) refuses to go along with their proposal to use swaped government debt to recapitalize the bank.

The Times reported that Spain’s plan to use 19 billion euros ($24 billion) in sovereign bonds to recapitalize the bank was in danger of violating a ban forbidding the central bank to finance governments.

Bankia is estimated to have 32 billion euros in toxic debt, mostly in the construction sector and property loans.

Spain continues to have struggles with their real estate market which began during the 2008 financial crisis.

The yield on Spain’s 10-year government bond continues to rise and has moved up 14 basis points to 6.6% across European markets.

Chinese Stimulus

Yesterday global markets rallied partly because of growing speculation that Beijing would undertake new stimulus measures to foster growth in China.

Today the Chinese government said that the country is not likely to match the same type of stimulus spending that was undertaken during the financial crisis of 2008.

Chinese officials from government and academia said that the Chinese central government’s stimulus plans will be mild compared to the previous actions taken four years ago.


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