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Announcement:

Moody's comments on Spanish government's additional measures to restore confidence in its banks

17 Oct 2008
Moody's comments on Spanish government's additional measures to restore confidence in its banks

Madrid, October 17, 2008 -- Moody's Investors Service today commented on the new additional set of measures to support the Spanish financial system announced by the Spanish Government this week, in accordance with the coordinated Eurozone plan communicated on 12 October. This new agreement follows Spain's announcement last week of the creation of a EUR30 billion - EUR50 billion emergency fund to provide liquidity to the financial system and the increase to EUR100,000 of the bank deposit guarantee to be provided by the Deposit Guarantee Fund (Fondo de Garantía de Depósitos).

Moody's understands that the new measures detailed in the Royal Decree Law 7/2008 October 13 comprise the following elements:

- The approval of up to EUR100 billion worth of state guarantees for new financing made since 14 October 2008 by credit entities based in Spain. The Royal Decree specifies that the funding instruments that will be covered are commercial paper and bonds traded in the official secondary markets in Spain, but also mentions the possibility of extending the guarantee to other instruments such as interbank deposits. The maximum maturity of the above-mentioned instruments is limited to five years and the granting of state guarantees will be finalised on 31 December 2009.

- The authorisation, on an exceptional basis and until 31 December 2009, for the Ministry of Economy and Finance to acquire instruments issued by credit institutions based in Spain in order to strengthen these institutions' equity. The instruments mentioned by the Decree Law include preferred shares and participation certificates ("cuotas participativas").

On the same day of the publication of the above-mentioned Royal Decree Law, the Spanish government also published a Royal-Decree Law 6/2008 October 10, which sheds more light on the functioning of the EUR30 billion - EUR50 billion emergency fund announced last week. Additionally, this Royal Decree Law states that the "healthy assets" bought by the emergency fund will be at market prices, and defines as "healthy assets" those financial instruments that are issued by credit entities and securitisation funds and are backed by loans granted to individuals, corporates and non-financial entities. In its introduction, the Royal Decree Law specifies that assets acquired by the fund should be domestic and that the fund will favour the acquisition of assets backed by loans granted after 7 October 2008 in order to ensure lending activity to individuals and corporates.

"In line with Moody's previous commentary issued on 9 October 2008, the rating agency views these proposals as positive in the current environment and believes they will help to restore confidence in the financial system. However, Moody's also confirms that it does not anticipate wholesale rating changes for rated banks as these already benefit from external support to varying degrees," explains Maria Cabanyes, Senior Vice President in Moody's Financial Institutions Group. In this context, rating actions (positive or negative) will continue to be influenced by the underlying credit and franchise fundamentals in line with Moody's established bank rating methodology, and will anticipate franchise strength following the scaling-back of these support programmes once the financial crisis abates.

Moreover, Moody's notes that, although the proposed government measures should help to ease the pressure on current liquidity constrains, Spanish banks are also experiencing a very rapid deterioration in asset quality driven (i) by their exposure to the real estate and construction sectors, which are undergoing a more pronounced and rapid correction than initially anticipated; and (ii) by an increasing decline in households' debt-servicing capacity as a result of both rising interest rates, growing unemployment, in some instances, aggressive growth strategies. Although Spanish banks display a relatively high risk-absorption capacity as a result of excess provisioning, Moody's notes that excess coverage is nevertheless rapidly declining and the fundamental credit trends in the system remain negative -- and these factors underpin the likelihood of further downward rating adjustments.

The exception will be bank obligations for which a clear substitution of risk will be made by the government for that of the bank, as in the case of explicit guarantees. In such cases, Moody's is anticipated to de-link the risk assessment from the bank and apply the appropriate government rating to the specific obligations, upon detailed review of the guarantee terms.

MOODY'S PERSPECTIVE

Last week, Moody's published a Special Comment, entitled "Assessing the Rating Implications for Banks of the Current Market Turmoil and Governmental Interventions to Support Their Banking Systems", which explains how Moody's manages bank ratings following the provision of governmental support.

BANKING SYSTEM OUTLOOK

The outlook for the Spanish banking system as a whole is negative, reflecting Moody's expectations of the fundamental credit conditions in the Spanish banking system over the next 12 to 18 months (please refer to Moody's Banking System Outlook for Spain, published in April 2008).

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Madrid
Maria Cabanyes
Senior Vice President
Financial Institutions Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY'S.

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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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