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Just reported by Bloomberg…S&P DOWNGRADES SPAIN
Specifically: Spain’s short-term credit rating was cut from A-1 to A-2.
The regular credit rating was cut to BBB+ from A.
The outlook is negative.
It’s possible that this will inspire a few chuckles, given how far Spain has fallen.
Here’s the full text of the downgrade.
We believe that the Kingdom of Spain’s budget trajectory will likely
deteriorate against a background of economic contraction in contrast with
our previous projections.
At the same time, we see an increasing likelihood that Spain’s government
will need to provide further fiscal support to the banking sector.
As a consequence, we believe there are heightened risks that Spain’s net
general government debt could rise further.
We are therefore lowering our long- and short-term sovereign credit
ratings on Spain to ‘BBB+/A-2’ from ‘A/A-1’.
The negative outlook on the long-term rating reflects our view of the
significant risks to Spain’s economic growth and budgetary performance,
and the impact we believe this will likely have on the sovereign’s
NEW YORK (Standard & Poor’s) April 26, 2012–Standard & Poor’s Ratings
Services today said it lowered its long-term sovereign credit rating on the
Kingdom of Spain to ‘BBB+’ from ‘A’. At the same time, we lowered the
short-term sovereign credit rating to ‘A-2’ from ‘A-1’. The outlook on the
long-term rating is negative.
Our transfer and convertibility (T&C) assessment for Spain, as for all
European Economic and Monetary Union (EMU or eurozone) members, is ‘AAA’,
reflecting Standard & Poor’s view that the likelihood of the European Central
Bank (ECB) restricting non-sovereign access to foreign currency needed for
debt service of non-euro obligations is low. This reflects the full and open
access to foreign currency that holders of euro currently enjoy and which we
expect to remain the case in the foreseeable future.
The downgrade reflects our view of mounting risks to Spain’s net general
government debt as a share of GDP in light of the contracting economy, in
particular due to:
The deterioration in the budget deficit trajectory for 2011-2015, in
contrast with our previous projections, and
The increasing likelihood that the government will need to provide
further fiscal support to the banking sector.
Consequently, we think risks are rising to fiscal performance and flexibility,
and to the sovereign debt burden, particularly in light of the increased
contingent liabilities that could materialise on the government’s balance
These concerns have led us to conclude a two notch downgrade is warranted in
accordance with our methodology (see “Sovereign Government Rating Methodology
And Assumptions,” June 30, 2011).
Under our revised base-case macroeconomic scenario, which we view as
consistent with the downgrade and the negative outlook, we have lowered our
forecast for GDP to contract in real terms by 1.5% in 2012 and 0.5% for 2013.
We had previously forecast real GDP growth of 0.3% in 2012 and 1% in 2013.
We believe that negative drags on GDP include:
Declining disposable incomes;
Implementation of the government’s front-loaded fiscal consolidation
The uncertain outlook for external demand in many of Spain’s key trading
In our opinion, the Spanish economy is rebalancing, and the measures the
government has taken should facilitate this process. Spain’s current account
deficit (CAD) is on a narrowing trajectory, significantly supported by the
Spanish economy’s strong export performance, especially since 2009. The CAD
was 3.5% of GDP at year-end 2011, compared with 10.0% in 2007. Excluding the
income deficit, the current account is in balance. The income deficit, which
reflects net interest and dividend payments on Spain’s net liabilities to the
rest of the world, widened in 2011 on the back of increased external funding
costs. We expect the current account to broadly balance in 2013-2014, before
posting a higher surplus thereafter. In contrast to 2008-2010, the Bank of
Spain–through Target2 overdrafts with the ECB (exceeding €250 billion in
March 2012, from around €150 billion at the end of 2011)–has now become the
major source of financing Spain’s CAD. In our opinion, this reflects the
extent to which Spain’s commercial banking system has sharply increased its
dependency on official funding sources to a considerably higher level than we
anticipated in January, when we last revised our rating on Spain (see “Spain’s
Ratings Lowered To ‘A/A-1’; Outlook Negative,” Jan. 13, 2012).
Despite the unfavorable economic conditions, we believe that the new
government has been front-loading and implementing a comprehensive set of
structural reforms, which should support economic growth over the longer term.
In particular, authorities have implemented a comprehensive reform of the
Spanish labour market, which we believe could significantly reduce many of the
existing structural rigidities and improve the flexibility in wage setting.
Even if, in our opinion, the reform is unlikely to eliminate the structural
duality in the Spanish labour market, we believe it will ultimately benefit
employment growth once a sustainable recovery sets in. In the near term,
increased labour market flexibility is likely to accelerate the necessary wage
adjustment and reduce the pace of job-shedding. At the same time, we do not
believe the labour reform measures will create net employment in the near term.
As a consequence, the already high unemployment rate–especially among the
young–will likely worsen until a sustainable recovery sets in.
Financial sector reform, announced in February 2012, requires banks to
allocate additional loan loss provisions and raise capital buffers on exposure
to real estate developments and construction projects. We believe these
sectors will continue to be the main sources of asset quality deterioration.
The reform has also led to further banking sector consolidation. Recent
acquirers have benefited from asset protection schemes, with potential losses
covered by a partial (80%) guarantee provided by the Deposit Insurance Fund to
absorb future credit losses from the acquired banks’ legacy portfolios. We
estimate that the guarantees related to these schemes, combined with those
that will likely be provided in the upcoming sale of three entities currently
controlled by the Fondo de Reestructuracion Ordenada Bancaria (FROB),
represent a contingent liability for the sovereign in the amount of about
3.75% of GDP. Combined with embedded risks in the rest of the banking sector,
public enterprises, and other state guarantees, we now estimate contingent
fiscal risks to the sovereign as moderate, as defined in our criteria (see “
Sovereign Government Rating Methodology And Assumptions,” published June 30,
We believe the ECB’s recent long-term repurchase operations (LTROs) have
significantly reduced the risks the Spanish banking sector faced in
refinancing its medium-term external debt and its short-term interbank
liabilities maturing in the first half of 2012. The LTRO also helped banks to
finance their government debt portfolios cheaply. Nevertheless, we do not view
the provision of liquidity support by the monetary authorities as a substitute
for financial sector restructuring and economic rebalancing.
In our view, the strategy to manage the European sovereign debt crisis
continues to lack effectiveness. We think credit conditions, and hence the
economic outlook for Spain, could now deteriorate further than we anticipated
earlier this year unless offsetting eurozone policy measures are implemented
to support investor confidence and stabilise capital flows with the rest of
the world. Such measures at the eurozone level could include a greater pooling
of fiscal resources and obligations, possibly direct bank support mechanisms
to weaken the sovereign-bank links, and a consolidation of banking supervision
or a greater harmonization of labour and wage policies.
In light of the rapid rise in public debt since 2008, we expect the Spanish
government to implement a sustained budgetary consolidation effort–including
strengthening fiscal surveillance frameworks at the regional government
level–aimed at gradually reducing the government’s net financing needs.
Balancing this commitment to stabilizing public finances with policymakers’
clear interest in preventing an acceleration of the economic downturn will be
challenging in the absence of fiscal transfers from abroad, or private-sector
credit creation at home. At the same time, we believe front-loaded fiscal
austerity in Spain will likely exacerbate the numerous risks to growth over
the medium term, highlighting the importance of offsetting stimulus through
labour market and structural reforms.
Following budgetary slippage of 2.5% of GDP in 2011 beyond the 6.0% target,
the government has committed to a target of 5.3% of GDP in 2012 and 3.0% in
2013. In our opinion, these targets are currently unlikely to be met given the
economic and financial environment. We forecast a budget deficit of 6.2% of
GDP in 2012 and 4.8% in 2013 (our previous forecasts were 5.1% and 4.4%). We
also believe the delay to adopting the 2012 budget could reduce the
government’s capacity to prevent deviations from its budget plans.
Given the significant and regular budgetary slippages at the regional
level-–the main contributor to the deviations from the government’s
targets–the national government’s willingness to fully enforce its new budget
will likely be tested as we expect the regions to post a shortfall of around
0.4% of GDP in 2012, above their 1.5% of GDP 2012 target. Because of
higher-than-previously-expected deficit projections, and other debt-increasing
items such as arrears resolutions (estimated at 3.9% of GDP in 2012), we
forecast net general government debt at 76.6% of GDP in 2014, against our
previous projection of 64.6% of GDP. State guarantees to the European
Financial Stability Fund, the European Stability Mechanism, and the
Electricity Deficit Amortization Fund, which are included in the government’s
own debt projections, are not part of our debt estimate and are instead
classified with other state guarantees.
In line with the increasing risks we see to Spain’s recovery, we have also
considered a downside scenario that, if it were to eventuate, could lead us to
lower the ratings again. This downside scenario assumes a deeper recession in
Spain this year, as a result of weaker external and domestic demand, with real
GDP declining by 4% in real terms, followed by a contraction of 1% in 2013 and
a weak recovery thereafter. Under this downside scenario, the current account
would adjust faster, but the general government deficit trajectory would
deteriorate further. The net general government debt ratio would breach 80% of
GDP. For details for all our scenarios, see our analysis on Spain.
The negative outlook reflects our view of the significant external and
domestic risks to Spain’s economic growth and budgetary performance, and the
impact we believe this may have on the sovereign’s creditworthiness.
We could lower the ratings if we were to see a rise in net general government
debt to above 80% of GDP during 2012-2014, reflecting fiscal deviations,
weakening growth, or the crystallization of contingent liabilities on the
government’s balance sheet beyond our current projections. We could also
consider a downgrade if political support for the current reform agenda were
to wane. Moreover, we could lower the ratings if we see that Spain’s external
position worsens or its competitiveness does not continue to approach that of
its trading partners, a key factor for Spain to return to sustainable economic
and employment growth.
We could revise the outlook to stable if we see that risks to external
financing conditions subside and Spain’s economic growth prospects improve,
enabling the net government debt ratio to stabilise below 80% of GDP.
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