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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
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
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.
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
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
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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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