Moody’s downgraded Spain from Aa2 to A1 yesterday (Tuesday), citing macroeconomic considerations. The downgrade could mean an end to Aaa Spanish covered bonds, according to Bernd Volk, head of covered bond research at Deutsche Bank.

The rating agency downgraded Spain because of moderate growth prospects for the country having been scaled back, lower economic growth making achieving “ambitious” fiscal targets even more challenging for Spain, and because the jurisdiction remained vulnerable to stress and event risk.

Moody’s noted that since it initiated its review of Spain’s rating, funding challenges for sovereign-related credits as well as uncertainties about the specifics of future euro area support, and about near term economic growth (and hence the likelihood of further deficit reduction) have increased rather than abated. The country’s credit strengths, on the other hand, have been largely unchanged, it added.

The outlook on Spain’s rating remains negative, said Moody’s, reflecting the downside risks from a potential further escalation of the euro area crisis.

Bernd Volk at Deutsche Bank said that the downgrade of Spain’s rating could be negative for cédulas.

“This is relevant for cédulas as Moody’s seemed recently unwilling to extend Aaa ratings for covered bonds in single-A rated countries,” he said. “Hence, numerous cédulas that are still Aaa may be downgraded soon.

“This is what happened in Portugal in July 2010,” he added.

Portugal was downgraded from Aa2 to A1 in July 2010 (it is now Ba2).

Volk said Moody’s may integrate its lower rating for Spain into the Timely Payment Indicator (TPI).

“Right now most of the Spanish covered bond programmes have TPIs of ‘probable’ to ‘probable-high’,” he said, “which is better than Italy, better than all other peripherals.

“My concern is that they will lower the TPIs to ‘improbable’ and all the covered bonds will be at risk.”

He added that if Spanish programmes have their TPIs lowered to “improbable” then the issuer ratings would need to be at least A1 for the covered bonds to stay Aaa-rated.

“Overall, while S&P is typically in the focus regarding covered bond ratings, the Moody’s approach is typically pretty harsh regarding linkage of sovereign and covered bond ratings,” he said.

“A few may make it still, but the risk has increased dramatically.”