No downgrade if Spain seeks full bailout

Fitch Ratings said Friday it would not downgrade Spain's credit if it seeks a full-blown sovereign bailout in addition to an existing banking rescue. A Spanish request for eurozone bailout funds to buy Spanish government bonds "would not prompt negative rating action from Fitch," it said, two days after Standard & Poor's gave a similar reassurance. Speculation is mounting that Spain may ask the eurozone's European Financial Stability Facility or incoming European Stability Mechanism to buy its newly issued bonds so as to bring down its spiralling borrowing costs. "Sovereign bond purchases by the EFSF/ESM, especially if supported by secondary market purchases by the ECB, would significantly reduce the risk of a self-fulfilling liquidity crisis," Fitch said. This would give Spain affordable market financing and ease pressure on its sovereign ratings, the agency said. "Such external support could provide Spain with the breathing space to implement its ambitious fiscal and economic reforms," Fitch added. "The credibility of Spain's fiscal consolidation effort and structural reform programme could also be enhanced by the 'policy conditional' nature of such support as Spain would have to agree a Memorandum of Understanding with the ESM/EFSF." Fitch warned, however, that it would reconsider Spain's ratings if the bond purchases by the eurozone authorities were aimed at completely replacing private financing instead of just providing support. "Fitch considers such a scenario as unlikely and its base case is that Spain will make sufficient progress towards addressing its macro-financial imbalances, including the restructuring of the banking sector, that it will retain market access, albeit with financial support from the ESM/EFSF and ECB." Fitch downgraded Spain to "BBB" from "A" in June, leaving it on a negative outlook, as it warned of the likely cost of restructuring banks laden with bad loans and the country's grim economic prospects.