Credit Rating Agency Moody’s Issues A “Stay Of Execution” For Spain…


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Credit Rating Agency Moody’s shocked the market yesterday by keeping Spain’s sovereign credit rating at BAA3, the lowest investment grade, instead of junk status as so many analysts have been predicting.  This is not only another “too big too fail” scenario in my opinion, but really brings Moody’s integrity into question as over 100% of their ratings actions following an Outlook Negative since 2010 have been downgrades, except of course in this case when a ratings downgrade would trigger a financial tsunami such as with Spain today…

Here are the details to Moody’s action:

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  • Euro Area, ECB and govt support should allow Spain to maintain capital market access at reasonable rates. Risk of losing market access materially cut. Decision reflects willingness of ECB to undertake outright purchases of Spanish bonds.
  • Negative outlook reflects baseline scenario risk high.
  • Possibility of Greek exit continues to be a major event risk for the weaker euro states.
  • Assumes Spain banks will require €100B in new capital.


  • The negative outlook on Spain’s confirmed Baa3 rating reflects Moody’s view that the risks to its baseline scenario are high and skewed to the downside. Risks to the economic outlook in Spain are significant, with repeated downward revisions of the country’s growth forecasts over the past year. Further downward revisions could have significant negative implications for the government’s ability to bring its public finances back onto a sustainable path and reverse its debt trajectory. Moody’s current baseline expectation is a resumption of growth in 2014, based mainly on the expectation of renewed growth in Spain’s core EU markets and hence continued positive export performance. Crucially, Moody’s fiscal forecasts of a gradual reduction in the general government’s budget deficit (to around 4.5% of GDP by 2014) are based on the expectation of a gradual and moderate recovery in economic growth. Should growth appear likely to weaken further still, Moody’s would need to reassess the government’s ability to achieve its fiscal objectives.
  • In addition, the central government continues to depend on the regional governments to contribute their part of the required fiscal consolidation. Despite measures to improve central control over the regions and the regions’ progress with implementing important measures to restrain their spending, Moody’s still expects some slippage from regional-level fiscal targets in aggregate. Should the measures taken prove less effective than intended, Moody’s would reassess the consequences for the central government’s programme. 
  • Moody’s observes that the wider European environment remains fragile. The ECB’s OMT announcement has bought time for the euro area authorities to push forward the broader financial, fiscal and economic reforms that are needed to address the institutional flaws that led to the crisis and to avoid further shocks to the financial system. However, there is significant uncertainty around the limits on the ECB’s willingness to undertake debt purchase operations on a large scale. Moreover, while progress continues to be made, the future path of policy remains very unclear. For example, while the proposed euro-wide banking union is a potentially significant step toward integration of financial regulation, the continued clear tensions between member states have the potential to materially slow down the process. Also, the possible exit of Greece from the euro area remains a risk and further source of contagion.
  • Overall, Moody’s assessment assumes that the Spanish government will continue to be able to refinance its maturing debt at affordable rates. Should any of the factors listed above lead the rating agency to conclude that the Spanish government had either lost, or was very likely to lose, access to private markets, then Moody’s would need to reassess its debt rating.


  • Moody’s would downgrade Spain’s rating if its current expectations regarding euro area and ECB support were to fail to materialise, or if the Spanish government failed to implement the necessary fiscal and other reform measures.
  • In view of the currently negative outlook on Spain’s sovereign rating, no upward rating movement is likely over the short term. However, Moody’s would consider returning the outlook on Spain’s rating to stable if the pace and strength of the country’s economic recovery were to exceed Moody’s current expectations.

How to interpret this report?

Moody’s report didn’t not offer any additional insight that the market didn’t already know.  The key reason in my opinion for Moody’s to keep Spain above junk is ECB’s OMT, so major applause to Signore Draghi.  However, I am inclined to believe that this rating’s decision is an appeasement to the market as none of the credit rating agencies want to be the one responsible for another major market sell-off.  The timing of this release is also very clever, just a day before the EU Leader’s Summit where Spain is rumored to request aid from ESM… 

Regardless of what I think of Moody’s, I believe this is a major positive factor for the Euro, and as I have said early week, it’s time to buy EUR on dips.  I believe EURUSD has the potential to make a new high, breaching the 1.3170 level, and reaching the 1.3500.  With Moody’s downgrade axe no longer above Spain, I believe the overall sentiment would be in the direction of Euro longs, especially considering that the Feds have been very clear that they will keep QE3 running indefinitely, thus adding more fundamental reasons to go LONG on EURUSD.



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About Henry Liu

My name is Henry Liu and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; it is my goal (and vision) to educate every trader on how to take advantage of news trading and become more balanced traders.

You can find more information about me on my Google Profile.


  1. Thanks Henry,please keep up the great work.God bless u.

  2. Thanks Henry

    Your analysis is great. i like this.


  1. […] Spain, the biggest news of the week came in the forms of Moody’s announcement to keep Spain’s sovereign credit rating at Baa3, just a notch above junk status. This lifeline by Moody’s was completed unexpected, as […]

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