European Downgrades Could Force 66 Billion in Spanish Selling

Charles Forelle from the WSJ writes today:

We noted in our story yesterday on the mess in Spain that one potential looming problem is credit-rating downgrades, which could force institutional investors who track indexes of government bonds to sell.

How much? The interest-rate strategy team at Morgan Stanley has crunched the numbers, and they figure it could be as much as €66 billion. That’s a lot. Spain hasaround €500 billion in outstanding bonds.

Data on bond holdings are incomplete, so there’s an element of guesswork here. But it gives a sense of the magnitude of the potential problem. Many investors track the major bond indexes and measure their performance against them. The precise rules vary, but the indexes typically require at least one investment-grade credit rating for a country’s bonds to be included. Greece’s and Portgual’s exile from indexes spurred selling when they were downgraded.

via WSJ

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