July 2, 2012 / 8:36 PM / 5 years ago

EU deal could be positive for Spanish banks - DBRS

NEW YORK, July 2 (Reuters) - Ratings agency DBRS said on Monday that a European deal to help the region’s banks could be positive for Spain’s financial firms, possibly sparing the country a rating cut that would trigger additional collateral at the European Central Bank.

Euro zone leaders agreed last week to let their rescue fund inject aid directly into stricken banks from next year, among other measures to deal with the area’s debt crisis.

That “could help stabilise Spain’s financial sector and reduce pressures on the Spanish government’s balance sheet, allowing for a lower and more sustainable debt trajectory,” Fergus J. McCormick, head of sovereign ratings, and Alan G. Reid, managing director, wrote in a report.

But “perhaps the greatest benefit of all,” they added, “is the prospect of the mutualisation of risk presented by support for the Spanish banking system, and possibly other countries.”

The loans from the European Stability Mechanism, or ESM, “would transfer the risk from the Spanish public sector to the ESM, whose paid-in capital comes from all of the euro zone member state budgets. This could have a sustainable impact on bond yields and help stabilize financial systems.”

McCormick and Reid cautioned that there are a number of unresolved questions around the deal, including the timeline for putting many measures in place.

Nevertheless, the deal “could weigh positively on DBRS’s sovereign ratings,” they wrote.

“If these measures are implemented, resulting in improved market sentiment, it could reduce bond yields and provide Spain and other Euro zone governments more breathing room to adjust public finances, stabilize public debt, and return to growth.”

Spain’s sovereign ratings have slid steadily this year as the country’s financial system stumbled, with Moody’s Investors Service, Fitch Ratings and Standard& Poor’s all rating the country below A.

Now DBRS, the last of the four rating firms the ECB uses to rate collateral, is the only one saving Spanish bonds from the extra charge the ECB imposes on sub A-rated government debt.

Last month, the rating agency said it would decide by late August whether or not to cut its ratings of Spain and Ireland below the crucial A threshold, a timeline DBRS reiterated in Monday’s report.

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