- On 23 March S&P raised Spain’s sovereign debt rating to A-.
- The agency recognised the economic recovery and the improvement in public finances.
- A better rating usually helps borrowing on better terms; it is worth using the moment to put one’s own financing in order.
On 23 March 2018, the agency S&P raised Spain’s sovereign debt rating to A-, reflecting the economic recovery and the improvement in public finances. It was an outside recognition of the path the Spanish economy had followed in previous years, and a signal that markets and international investors take into account when deciding where to place their money. So does the state itself, which borrows by issuing debt and has an interest in that debt being seen as safe.
Debt ratings often seem a distant matter, the preserve of governments and large investors. Yet they influence the environment in which companies and families operate: what it costs to borrow, how willing banks are to lend and the confidence with which a country is viewed from abroad. Understanding how they work helps to interpret economic news better. It also avoids both excessive enthusiasm at an improvement and disproportionate alarm at a deterioration.
What a rating measures
Rating agencies assess the ability of an issuer, in this case a state, to repay its debt. A higher grade indicates lower perceived risk and, in principle, helps the state and the country’s companies to borrow on better terms.
The rating is expressed in letters, and each step reflects a different probability that the debtor will pay. It is neither an exact measure nor a guarantee: it is the informed opinion of an agency, based on growth, indebtedness, the ability to raise revenue and institutional stability. Investors regard it as one piece of data among others, but its effect on the perception of risk can be considerable. When the grade rises, the country tends to appear to investors as a somewhat safer option; when it falls, the opposite happens.
A sign of recovery
The upgrade reflected the growth of the economy and progress in the public accounts. It was a recognition of a track record, not a guarantee for the future: ratings are reviewed as circumstances evolve, and none is final.
The figure is best read with that balance in mind. An upgrade speaks of what has happened so far and of the outlook the agency considers reasonable, but it does not prevent the situation from changing. For the citizen, the useful point is that the financial environment improves when accounts are put in order, and that the improvement can be reversed if conditions deteriorate. Keeping that perspective helps avoid basing long-term decisions, such as heavy borrowing, on a good headline alone.
Effect on financing
For companies and families, the effect is indirect but real: the perception of the country’s solvency influences the cost of credit and the willingness of investors. It is worth using periods of improvement to put one’s own financing in order, lengthen terms or renegotiate conditions where possible. It is not the same to have debt in order in a calm moment as to be forced to renegotiate under pressure.
A good practice is to take stock of all debts: their amount, interest rate, maturity and guarantees. With that information one can talk to lenders in an informed way, compare offers and decide whether refinancing is worthwhile. And a financial adviser can help judge whether the conditions on offer are really better than the current ones, taking into account the costs of cancelling or changing a loan. If the comparison is favourable, a moment of improved conditions may be a good occasion to act; if not, there is no obligation to do anything.
A good piece of macroeconomic news is a good occasion to review your own financial house.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
