Having been usurped from the euro zone headlines in recent
days, Spain re-entered the fold with news of a dramatic ratings cut yesterday,
Spanish debt now stands just one rating level above ‘Junk’.

Last night Standard & Poor’s, one of the big three credit
ratings agencies, delivered its view that Spain’s debt is now only worthy of a
BBB- rating, perilously close to the same classification that Greece and
Portugal share for their bonds.

Having been usurped from the euro zone headlines in recent
days, Spain re-entered the fold with news of a dramatic ratings cut yesterday,
Spanish debt now stands just one rating level above ‘Junk’.

Last night Standard & Poor’s, one of the big three credit
ratings agencies, delivered its view that Spain’s debt is now only worthy of a
BBB- rating, perilously close to the same classification that Greece and
Portugal share for their bonds.

Having already caused Spanish bond yields to increase to
5.8%, further escalation is expected as the nation edges closer to the dreaded
6% that is typically thought of as an unsustainable borrowing rate.

If the note yields persist above 6%, the point at which
Mariano Rajoy’s government would require ECB help will advance rapidly. Already
stringent fiscal policies would leave the economy floundering should the cost
of borrowing increase, discounting any hopes of progression.

The move from Standard & Poor’s, perhaps most surprising
because it hadn’t already happened, could prompt an acceleration of the Spanish
bailout ordeal, though no knee-jerk reaction is to be expected. Investors may
feel that the announcement could provoke action in the not too distant future,
perhaps explaining the morning’s early resistance.

Looking forward the decision could lead to weakness for the
euro as markets realise the impact on borrowing. Shaking the euro zone, this
news could mean investor risk aversion, therefore the yen and dollar could see
future gains against their peers.

 

Key Announcements
Today:

• All Day – ALL – G7 Meetings
• 07.00am – EUR – German CPI m/m: Remained at 0%
• 07.45am – EUR – French CPI m/m: entered deflation at -0.3%
• 09.00am – EUR – ECB Monthly Bulletin
• 13.30pm – USD – Trade Balance: deficit expected to widen to
  -44.1bn
• 13.30pm – USD – Unemployment Claims: expected to remain
  close to level
• 15.00pm – USD – Import Prices: expected to remain at 0.7%