What’s the Story? Spain Again

by CC June 8, 2012 9:14 am • Commentary


U.S. stock futures fell, indicating the Standard & Poor’s 500 Index will trim its biggest weekly gain in 2012, as commodities tumbled and disappointing economic data in Europe added to concern about a global slowdown.

Freeport-McMoRan Copper & Gold Inc. (FCX) and Newmont Mining Corp. (NEM) dropped more than 1 percent. McDonald’s Corp. (MCD), the world’s largest restaurant chain, retreated 2.9 percent as its May sales trailed analysts’ estimates. Chesapeake Energy Corp. (CHK) gained 0.8 percent after agreeing to sell its pipeline interests to Global Infrastructure Partners for $4.08 billion.


The euro fell on Friday after a three-notch downgrade to Spain’s credit rating and signs of economic weakness in Italy and Germany, leaving it vulnerable to further falls as concerns ratchet up about a deepening euro zone debt crisis.

European Union and German sources told Reuters Spain was expected to make a request over the weekend for an aid package to prop up its troubled banks, highlighting the vulnerability of the country’s financial sector.

Rating agency Fitch slashed Spain’s credit rating on Thursday, leaving it just two notches short of junk status. It signaled further downgrades could come as the country tries to restructure its troubled banking system.


Yes, the ratings agencies are a severely lagging indicator and, yes, we don’t often get why the news cycle is so very dominated by their announcements (irony aside) but it is worth remembering the implication of Fitch’s latest swipe for haircuts on ECB collateral.

The point being that if all all three agencies downgrade Spain to BBB+ (or its equivalent) or below, the ECB risk framework would increase haircuts by 5 per cent on Spanish government bonds.

Currently we have:

S&P  on BBB+
Fitch on BBB
And Moody’s on A3, with a negative outlook. (A3 is only one notch above the BBB+ equivalent)

Calculated Risk

The Department of Commerce reported:

[T]otal April exports of $182.9 billion and imports of $233.0 billion resulted in a goods and services deficit of $50.1 billion, down from $52.6 billion in March, revised. April exports were $1.5 billion less than March exports of $184.4 billion. April imports were $4.1 billion less than March imports of $237.1 billion.

The trade deficit was above the consensus forecast of $49.3 billion.