July 24, 2012 / 7:14 PM / 8 years ago

DBRS warns on Spain "tipping point" ahead of rating cut deadline

NEW YORK (Reuters) - Spain is nearing a tipping point in which the euro zone country needs to restore investor faith or potentially be prompted to ask for a bailout in the face of unsustainable debt costs, credit rating agency DBRS said on Tuesday.

The agency warned that four factors could push Spain and the euro zone deeper into crisis: a sharper recession as stressed economy-wide financing conditions persist, an insufficient backstop of capital, external shocks, and setbacks to fiscal and structural adjustment.

“In the immediate future, if investor confidence is not restored, financial stabilization and economic recovery are likely to be delayed, increasing the difficulty of the fiscal adjustment and the need for bank recapitalization,” wrote analysts Fergus McCormick and Alan G. Reid.

“Furthermore, if the stress on Spanish bond yields were to persist, it could call into question the affordability of sovereign debt. In this event, Spain may need to turn to official creditors” for help beyond its request for aid to the ailing banking sector.

DBRS said last month it would decide by late August whether to cut its ratings of Spain and Ireland below the crucial A threshold, a move that could substantially raise the cost of funding for the two countries’ hard hit banks.

A downgrade from the A (high) rating DBRS now has for Spain and A (low) for Ireland, to triple-B or lower would — under current European Central Bank rules — trigger the ECB to charge commercial banks an additional 5 percent penalty for using Spain’s bonds as collateral in its lending operations.

DBRS is one of four rating firms the ECB uses to rate collateral and, following Moody’s three-notch downgrade of Spain in June, is the only one saving both Spanish and Irish bonds from the extra charge.

“Given its size as the fourth-largest economy in the euro zone, the stability of Spain is critical to the stability of Italy and the rest of the euro zone,” McCormick and Reid wrote in Tuesday’s report.

Reporting by Luciana Lopez; Editing by James Dalgleish

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