Although last Friday’s announcement by Standard and Poors that Spain is to be downgraded by two notches from A to BBB+ was not greeted by the market with any great surprise, nor the follow up on Monday that a number of the country’s major banks are to follow, the fact is that things have change for the Spanish debt issuance.

In a note on Tuesday Gillham said that, while the headlines focus on the long term rating, little has been written about the downgrade of the short term credit ratings from A-1, or tier 1, to A-2, tier 2.

“The implications of this are not immediately obvious to outside observers because the application of a credit rating is often made in a longer term context. Sovereign countries are a case in point with much written in the press about multi-year austerity plans.”

But short term credit ratings deal with the near term credit profile of an issuer, specifically over a one year time frame. In the context of a country facing a multi-year austerity programme, one year may seem a very short time period indeed, Gillham pointed out, and so the danger is that short term ratings are overlooked.

“However, their importance to money market funds is key, in particular because top quality money market funds cannot allocate to tier 2 rated credits. By Standard and Poors own ‘principal stability’ fund rating criteria, this precludes Italian and now Spanish sovereigns together with a number of their major banks given their A-2 short term ratings.

“In reality, many money market funds have shied away from peripheral banks and sovereigns for some time, but the fact that they are not eligible by their credit rating is a significant statement indeed. For the banks in particular, money market funds have been important sources of funding in the past.

“While the ECB’s LTRO programme can take up the slack in the short term, it is likely only to be a matter of time before the market turns its attention back to longer term funding prospects at which point S&P’s downgrade decision could prove very important indeed.”

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