Moody's decision to downgrade five Spanish regions, which was announced overnight, as well as the flow of disappointing corporate earnings reports caused the European markets to tumble on Tuesday. EUR/USD dropped to the 1.2960 area, as mounting risk aversion weighed on the cross.
Catalonia to receive 99 million euros of aid in advance
Spanish Minister of Finance and Public Administrations Cristóbal Montoro announced on Tuesday that Catalonia would be granted another part of the 5.4 billion euro aid in advance, in order to immediately cover the region's debts with pharmacies.
The autonomous region has already received 1.039 billion euros of rescue money from the Spanish government's Liquidity Fund. The next tranche will be released earlier in order to avoid a strike planned by the pharmaceutical sector for November 25, in response to the non-payment of debts by the Catalan government.
ECB's OMT to be limited to ensure price stability
The bond market interventions under the OMT program would be limited to ensure the price stability, the ECB Governing Council member and Central Bank of Luxembourg president Yves Mersch said in a speech on Tuesday.
As far as the ECB mandate is to ensure the price stability, "OMTs will be only used if – and to the extent – necessary to ensure price stability," Mersch states.
Mersch also commented that the ECB’s new bond buy plan mustn't turn into monetary financing via. "Secondary bond market interventions must not serve to circumvent the taboo of primary market" purchases.
Decent demand at Spanish bond auction
Spain held a bond auction on Tuesday during which it managed to sell 3.5 billion worth of 3- and 6-year government bonds at higher yields in case of the former and at lower yields in case of the latter.
967 million of 3-year bonds were sold at an average yield of 1.41%, compared with 1.20% seen at the previous auction. 2.6 billion of 6-year bonds were sold at an average yield of 2.02%, versus the previous 2.21%.
Moody's cuts rating on five Spanish regions
Moody's Investors Service just announced downgrades by one or two notches the ratings in five Spanish regions, including Andalucia, Extremadura, Castilla-La Mancha, Catalunya, and Murcia. In the statement, Moody's also confirms the ratings of the Basque Country and the Diputacion Foral de Bizkaia at Baa2. In addition, the ratings of the regions of Madrid, Castilla y Leon and Galicia have also been confirmed at Baa3. The ratings of Valencia were also confirmed at B1.
The regions hit by downgrades, according to Moody's, "carry negative outlooks in line with the negative outlook carried by the Baa3 sovereign bond rating of the Government of Spain." Today's rating actions conclude the review initiated on 15 June 2012.
Moody's rationale: "The decision was driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs. In addition, Catalunya, Andalucia and Murcia face large debt redemptions in Q4 2012 when retail bonds issued in 2011 are due to mature. In this context, five regions -- namely, Catalunya, Andalucia, Murcia, Valencia and Castilla La Mancha -- have already requested liquidity support from the Fondo de Liquidez Autonomico (FLA) to cover their financing needs in the second half of 2012."