Spanish downgrade fallout – UBS
At the end of the US session yesterday, S&P downgraded Spain's sovereign rating by two notches to BBB-. In the aftermath of this movement, the EUR/USD was slow to react, but eventually fell 30 pips. According to Research Analyst Gareth Berry at UBS, “The ratings agency cited deepening economic recession and rising unemployment, which are limiting the government's policy options and adding to the frictions between the central and regional governments.”
S&P further noted that the hesitation of the government to request a bailout increases the downside risks to Spain's rating, which remains on negative outlook. “We think the announcement has hurt the euro as much as it is going to though, given that no important levels in the ratings table were crossed and that the downgrade arguably marginally raises the likelihood that Spain will request a rescue sooner rather than later, which would fulfill one of the necessary conditions for the ECB to begin bond buying.” Berry adds.