By Heidi N. Moore
July 1, 2010

Sketchy credit? Questionable future? Step this way to the debt markets. Capitalism’s villains are still selling, but for how long?

By Heidi N. Moore, contributor

The public outrage attached to much of the financial crisis has centered on the problem of “privatized gains and socialized losses,” or the idea that corporations and countries can act irresponsibly to make money, then have taxpayers to bail them out.  That was an indication of the broken market.

But now that the markets are moving toward better repair (mind you, they still seem to be held together with band-aids, lint and bubblegum) there has been a surprising move by money managers, hedge funds and other institutions to help some of the hardest-hit countries and companies raise money or get more debt. It’s probably a sign of a healthy move toward privatized losses; put another way, maybe the free market is starting to work again.

Exhibit A this morning is rating firm Moody’s decision to put Spain under a three-month review that could result in the country losing two notches of its credit rating. While the analyst who wrote about the potential downgrade maintained that “Spain is a highly creditworthy country,” and that it is not like Greece, Moody’s actions belie its words: The agency did actually choose today to downgrade five of Spain’s major regions.

Faith in Spain is eroding, as it is for many of the troubled Eurozone economies. Economists believe that Spain and Italy may have to tap the bailout fund created by the European Central Bank and the International Monetary Fund earlier this year. Reuters said that Moody’s is the only agency that has still kept a top rating on Spain.

Nonetheless, Spain has had no trouble raising money. The markets were ready to help as long as Spain was willing to pay through the nose to borrow. In mid-June the country successfully sold off 3.5 billion euros of its 30-year and 10-year bonds, and there was also a sale of the same size of its five-year bonds today.

The markets were ready to buy Spain’s bonds because investors were getting incredibly high interest rates. Between March and now, Spain has had to pay investors 16% higher interest rates to lure them to buy its bonds. You’ll also notice that the maturities of Spain’s bonds have fallen; where two weeks ago, Spain could sell long-maturity bonds, now investors are pushing for shorter-term borrowing based on the country’s prospects for the next five years.

Similarly, the markets have welcomed BP, currently suffering a villainous reputation in the United States and huge oil spill liabilities.

BP (BP) had a large cash balance at the time of the spill — over $5 billion — but the company would be foolish to spend it all to meet its responsibilities to the cleanup efforts in the Gulf. Instead, BP has successfully turned to the debt markets to borrow $20 billion, and now is considering borrowing $5 billion more according to a Financial Times report today.

As with Spain, BP has had to make serious compromises in pricing. BP’s credit rating, which was the highest possible for a company before June, was cut June 3 by Fitch and then on June 15 was cut another six notches. Two more notches, and BP will be forced to sell its bonds as junk-rated. The markets are already valuing BP that way: As of mid-June, BP’s debt carried an interest rate 730 to 757 basis points higher than Treasurys — more expensive than many junk-rated corporate bonds.

Although credit is still tight in many areas of the economy, the fact that investors are willing to take the risk of buying the debt of troubled countries and companies is a sign that the market is at least trying to take care of its own. We’ll see in a few months how that works out.

–Heidi Moore is Sweeping the Street for the two weeks that Colin Barr is on vacation.

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