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Global Credit Research - 24 Apr 2013
London, 24 April 2013 -- In its annual credit report on Spain, Moody's Investors Service
says that the Baa3 government bond rating is based on the country's
moderate economic strength, high institutional strength as well
as low government financial strength, which contribute to its high
susceptibility to event risk. The downside risks to Spain's
sovereign creditworthiness are material, arising mainly from the
weak growth outlook and its impact on the public finances and the public
debt trajectory, and are reflected in the negative outlook on the
rating.
The rating agency's report is an annual update to the markets and does
not constitute a rating action.
Moody's determines a country's sovereign rating by assessing it on the
basis of four key factors -- economic strength, institutional
strength, government financial strength and susceptibility to event
risk -- as well as the interplay between them.
Moody's says that Spain's moderate economic strength score
balances the size of its economy as one of world's largest with
broad diversification and high wealth levels, with its negative
short and medium-term growth prospects. The rating agency
expects the recession to continue in 2013 and there is significant uncertainty
over Spain's medium to longer-term growth trajectory given
the need for all sectors of the economy to reduce their high debt levels
over the coming years. Moody's central growth scenario anticipates
that the Spanish economy will return to positive -- albeit very moderate
-- growth in 2014; however, the downside risks to this
scenario are material. A significantly weaker economic performance
that has consequences for public finances and the public debt trajectory
constitutes a downside risk for Spain's rating.
Moody's assesses Spain's institutional strength as high,
given the important economic reforms implemented over the past two years,
namely of the labour market, the pension system and more recently
the framework for regional government finances. The government
also started to address the substantial fiscal deterioration in 2012 and
the restructuring of the banking system has been significantly accelerated
following the support agreement with the euro area partners. These
are positive and crucial steps to bring the economy and public finances
back onto a sustainable path and as such support the rating agency's
assessment of high institutional strength. On the other hand,
Moody's remains concerned about repeated upward revisions to budget
deficit outcomes, which damage the government's fiscal credibility.
Government financial strength is considered by Moody's to be low,
reflecting the difficulties the government is facing in returning its
public finances to a sustainable path and stabilizing the public debt.
The current rating is based on the rating agency's assumption of
a gradual further reduction in the budget deficit to 5%-5.5%
of GDP in 2014 from the 2012 level of 7% of GDP (excluding capital
injections into the banking sector). This trajectory takes into
account the very weak economic circumstances. Under these assumptions
the public debt ratio will continue to rise and will probably only stabilise
after the middle of the decade at above 100% of GDP. This
forecast includes the full amount of EUR100 billion available under Spain's
banking sector support package as Moody's continues to see a significant
probability that the Spanish banking sector will require further capital
support.
Spain's susceptibility to event risk is considered to be high,
mainly reflecting the continuing risks emanating from the banking sector
as well as events in the wider euro area. The move towards 'bailing-in'
bank creditors (and uninsured depositors) is in principle positive for
sovereign balance sheets. However, this might be achieved
at the cost of increasing the risk of deposit runs and higher bank funding
costs, with unclear eventual consequences for a sovereign.
Also, progress towards banking union remains slow, against
the background of continuing divergent opinions between member states.
Moody's views the unpredictability of policy responses and the lack
of progress in strengthening the euro area as key risk factors that can
undermine the progress achieved to date.
Moody's annual credit report on Spain is now available on www.moodys.com.
NOTE TO JOURNALISTS ONLY: For more information, please call
one of our global press information hotlines: London +44-20-7772-5456,
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You can also email us at mediarelations@moodys.com or visit our
web site at www.moodys.com.
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 Jan Sebastian 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 publishes annual sovereign credit analysis on Spain
No Related Data.
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