Contagion Carries Downgrades Deeper into EU. Rates Storing Energy for Auction

By: •

Spain Downgraded To 'AA' On Protracted Economic Adjustment And Risks To Budgetary Position; Outlook Negative

From S&P RATINGS:

  •  In our opinion, Spain is likely to have an extended period of subdued economic growth, which weakens its budgetary position
  •  We are lowering our long-term rating on the Kingdom of Spain to 'AA' from 'AA+'.
  • The negative outlook reflects the possibility of a downgrade if Spain's budgetary position underperforms to a greater extent than we currently anticipate.

The downgrade primarily reflects Standard & Poor's downward revision of its medium-term macroeconomic projections. "We now believe that the Spanish economy's shift away from credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,"

We continue to believe that the 2010 fiscal deficit will be broadly in line with the government's target of 9.8% of GDP. However, over the medium term we anticipate weaker revenue performance and higher spending pressures than what the government envisages, mainly due to our view of more subdued economic growth compared with the government's current estimates. As a result, Standard & Poor's projects that the general government deficit is likely to still exceed 5% of GDP by 2013, significantly higher than the government's official target of 3%

Standard & Poor's credit analyst Marko Mrsnik said. "We now project that real GDP growth will average 0.7% annually in 2010-2016, versus our previous expectations of above 1% annually over this period."

------------------------------------------------------------------

HERE ARE RATINGS DEFINITIONS.....and the S&P Ratings Scale. 

Ever hear the phrase "The Four C's of Underwriting"????

  1. Character of the Issuer
  2. Capacity to Repay
  3. Collateral
  4. Covenants of the debt issue (obligations of the issuer and borrower)

Plain and Simple: the ratings agency now sees a lower probability of Spain being able to stay current on all promised debt payments over the life of the debt.

Yesterday I heard Senator Levin tell Lloyd B. that someone needed to see what was going on over at the ratings agencies. The FCIC already issued a subpoena to Moody's...now the Senate Subcommittee on Investigations wants some too? How they've made it this far I do not know...rating agencies are only as good as their research.

MY POINT:  the ratings agencies won't escape financial reform without changes to their business model

UPDATE ON THE GREEK RESCUE PACKAGE:

BERLIN, April 28 (Reuters) - A decision on granting aid to Greece is needed quickly, the heads of the European Central Bank and IMF said on Wednesday, but did not confirm reports the bailout package could balloon to 120 billion euros over three years. 

2-Year Greek Debt is not doing any better either....currently still costing Greece over 18%

 Treasury trading volume is above average ahead of the 1pm bid cutoff for $42 bn 5s. The just auctioned 2 year note and soon to be just auctioned 5 year note are the biggest losers today.

The FN 4.5 is just off its lowest price of the day, currently -0-08 at 100-13 yielding 4.458%. The secondary market current coupon is 4.448%.

CHANCES FOR REPRICES FOR THE WORSE ARE RISING. I WILL ADD COMMENTS TO THIS POST AFTER THE AUCTION