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Announcement:

Moody's Review Of Spanish Government's Baa3 rating Likely To Continue Through The End Of September

Global Credit Research - 30 Aug 2012

London, 30 August 2012 -- The Baa3 long term debt rating of the Spanish government remains on review for possible downgrade. The review commenced on 13 June 2012 and will likely continue through the end of September because of pending information on:

(1) the scope of the bank recapitalisation needs;

(2) the nature and size of support mechanisms available under the European Stability Mechanism (ESM) in light the upcoming German Constitutional court ruling; and

(3) potential changes and additions to the existing crisis-management framework as policymakers reconvene in the next few weeks to discuss policy options in a number of areas, including the further advancement of a banking union.

At the same time, Moody's cannot exclude the need for more immediate action if Spain's ability to refinance maturing debt was to deteriorate sharply, prompting the country to seek external support beyond the recapitalisation programme. While full support under these market conditions would alleviate the risk of a default in the short term, Moody's believes that medium-term risks to bondholders would increase in such a scenario.

RATIONALE FOR CONTINUING THE REVIEW

--SCOPE OF BANK RECAPITALISATION NEEDS--

As noted in the 13 June rating announcement, the first key driver of the review is the size and terms of the banking support package, including the potential size of the government's liability following the results of the independent valuations and audits of all the Spanish banks. Those audits were originally expected on 31 July, but are now expected to be published only by the second half of September. By then, Moody's also expects to have more details on the external Asset Management Company to which impaired real-estate assets of those banks that need to access public funds will have to be transferred.

--UPCOMING GERMAN COURT RULING ON ESM--

Additionally, the German Federal Constitutional Court indicated in July that it would take until mid-September before ruling on a temporary injunction preventing Germany (Aaa negative) from participating in the ESM. While Moody's expects the court to ultimately rule in favour of Germany's participation, the delay prevented the ESM from being introduced in July as originally planned and has introduced a further element of uncertainty.

--POTENTIAL CHANGES AND ADDITIONS TO THE EXISTING CRISIS-MANAGEMENT FRAMEWORK--

A critical part of the review is focused on assessing the probability that Spain may require more comprehensive external support should the banking recapitalisation not succeed in restoring some degree of confidence in the banking sector and, in consequence, in the sovereign's credit standing. In that regard, new developments on, or changes to, the crisis-management framework can provide insight on this specific issue.

Moody's notes that external support can vary in scope and in form. Limited targeted official interventions supporting market funding can be of benefit to bondholders if those measures, combined with credible policy action by the government, prove effective in ultimately securing market access at sustainable prices.

At the same time, Moody's believes that while reducing default risk in the near term, the conditional nature of the kind of support programmes implemented to-date to support euro area countries following market-access loss ultimately entails additional risks to bondholders over the medium-term horizon. Unless fiscal consolidation efforts and structural reforms were to prove successful, return to the sovereign debt market at the end of such a programme could prove very difficult, raising the prospect of debt relief by private sector creditors as a pre-condition to an extension of further support by official creditors. Such risks in our view are not compatible with an investment grade rating.

Moody's also notes that official support beyond banking recapitalisation but short of a full package may also pressure the rating below investment-grade if (1) the combined measures were unlikely to succeed in maintaining ample market access; or (2) if these measures were effectively providing the bulk of the Spanish government's funding needs through crisis-management tools such as the European Financial Stability Facility and ESM, and European Central Bank actions that provide liquidity to government debt markets. Once again, short of the accompanying fiscal and structural reforms being successful, full return to market access at the end of these initiatives may prove very difficult, raising the risk of private sector participation in a debt relief effort before more official support is provided.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Sovereign Bond Ratings Methodology published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Kathrin Muehlbronner
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Review Of Spanish Government's Baa3 rating Likely To Continue Through The End Of September
No Related Data.

 

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