Spain's future is looking a little brighter than it has in recent weeks, after Moody's left the troubled country's credit rating in investment-grade territory.
The decision to refrain from slapping Spain with a junk rating was based on an assumption that Madrid will tap Europe's bailout fund, the European Stability Mechanism, and reflects progress the country has made on fiscal and banking reforms, said Moody's late Tuesday.
It was also a pleasant surprise for investors.
"By passing on the opportunity to downgrade Spain's rating to junk, Moody's removed one major uncertainty from the financial markets, and investors around the world have responded positively," said Kathy Lien, managing director of foreign exchange strategy for BK Asset Management.
The euro broke through the $1.30 level Wednesday and is trading at a one-month high versus the dollar, while the yield on Spain's 10-year bond fell as low as 5.462%, the lowest since early April. Spain's benchmark IBEX 35 index jumped more than 2% Wednesday.
Meanwhile, the cost of insuring Spanish government debt against default dropped to a 15-month low, according to data from Markit. The spread on five-year Spanish credit default swaps, narrowed to 277 basis points from 347 basis points.
While Spain avoided a downgrade by Moody's, the rating agency still maintains a negative outlook on the country given the challenges that lie ahead.
Spain has yet to formally ask for a bailout, but expectations are that it will soon seek a line of credit from the ESM, which would allow the European Central Bank to start buying its bonds.
The fate of Europe's latest rescue fund will be decided this week by a high court in Germany.
At issue is an injunction that would block the German parliament from ratifying the international treaty governing the European Stability Mechanism, or ESM.
The ESM is a key component of the "breakthrough" agreement announced in June by euro area leaders, including German Chancellor Angela Merkel, that is aimed at stabilizing financial markets and strengthening MOREBen Rooney - Sep 10, 2012 7:46 AM ET
Spain is well on the way to securing up to 100 billion euros from the European Union to bailout its banks. But yields on Spanish bonds are going up. What gives?
Germany. That's what.
Germany wants the money for Spain's bank bailout to come from the European Stability Mechanism, as opposed to the European Financial Stability Facility, according to an official in the German finance ministry.
"If you want to use the more MOREBen Rooney - Jun 11, 2012 3:22 PM ET
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