(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Neil Unmack
Spain will be spared minor market mayhem - for now. The decision of Moody's to keep the country's debt under review until September means that Madrid will avoid a downgrade that would have placed it in junk territory, making it hard for some investors to hold its bonds. This gives the euro zone a chance to get its bailout, complete with European Central Bank bond buying, up and running, or at least give details on how it will work.
The way the new bailouts will work are the heart of the matter. The original euro zone bailouts, such as Portugal's and Ireland's, had disastrous consequences when investors started worrying about possible restructuring down the road. Rating downgrades follow, investors are forced to sell, and funding costs for the economy rise.
On the contrary, the ECB's new approach is designed to allow a country to keep funding itself in the markets: the plan is for the bailout funds to buy some of the country's newly-issued bonds, while the central bank acquires bonds in the secondary market. If the buying is powerful enough, investors might go along with it and buy Spanish debt, gradually restoring market access.
Fitch, which rates Spain two notches above junk, said recently it wouldn't need to review the country's rating as long as Spain is not solely reliant on external support. Moody's approach is more nuanced; Spain will not be junked if it can maintain "ample" market access, or if official support does not provide the "bulk" of its funding. Where market access ends and "official" aid begins is a nebulous concept; much of Spain's funding comes from its banks, themselves propped up with ECB liquidity, and soon with capital from the EFSF bailout fund.
Bailout 2.0 may work, but investors may worry that the ECB will curtail its intervention if it is disappointed by Spain's pace of reform. If the country's market access then deteriorates, the risk of a downgrade will rise. That wouldn't be a massive deal in itself if other rating firms don't follow, but it could dent confidence at a vulnerable moment.