London, 16 October 2012 -- Moody's Investors Service has today confirmed the Kingdom of Spain's Baa3
government bond rating and assigned a negative outlook to the rating.
In addition, Moody's has confirmed Spain's short-term
rating at (P)Prime-3. Today's rating action concludes
the review for possible further downgrade of Spain's rating that
Moody's had initiated on 13 June 2012.
The decision to confirm the Kingdom of Spain's sovereign ratings reflects
the following positive developments since June:
1.) Moody's assessment that the risk of the Spanish sovereign
losing market access has been materially reduced by the willingness of
the European Central Bank (ECB) to undertake outright purchases of Spanish
government bonds to contain their price volatility. The rating
agency believes that Spain will likely apply for a precautionary credit
line from the European Stability Mechanism (ESM). This should in
turn help sustain demand for Spanish government bonds by allowing the
ECB to activate its Outright Monetary Transactions (OMT) program of secondary
market purchases. Entry into an ESM precautionary program would
not in itself lead to a downgrade as long as the rating agency believes
that the government is likely to retain access to private capital markets.
2.) Evidence of the Spanish government's continued commitment
to implement the fiscal and structural reform measures that are needed
to stabilize its debt trajectory, as indicated by the package of
fiscal measures announced in July, the changes to the institutional
framework for regional government finances and, more recently,
the announcement of further structural reforms to be implemented in the
coming months. In this respect, Moody's considers the
external monitoring of the Spanish government's implementation of
its plans that would accompany an ESM precautionary credit line to be
a positive factor. The rating agency's base case assumes
that the Spanish government will be successful in gradually reducing its
large budget deficit and arresting the rise in its debt burden.
3.) The ongoing progress towards restructuring the Spanish banking
sector and enhancing the solvency of the affected banks, which should
help to restore market confidence in Spain's banking system as a
whole.
In summary, Moody's believes that the combination of euro
area and ECB support and the Spanish government's own efforts should
allow the government to maintain capital market access at reasonable rates,
providing it with the time it needs to stabilise public debt over the
next few years. In Moody's view, the maintenance of
market access is critical because the risk that some form of burden-sharing
will be imposed on bondholders is material for those countries that rely
entirely or to a very large extent on official-sector funding for
an extended period of time.
The negative rating outlook reflects Moody's assessment that the
risks to its baseline scenario are high and skewed to the downside.
In particular, Spain's credit standing would be negatively
affected by a lack of progress in placing the country's public finances
on a sustainable footing. Shocks at the euro area level could also
have negative repercussions on Spain's rating, for example
in the absence of concrete progress in reforming the euro area's
fiscal, economic and regulatory institutions. The possibility
of Greece exiting the euro area continues to constitute a major event
risk for all the weaker euro area member states. Should any such
factors lead the rating agency to conclude that the Spanish government
had either lost, or was very likely to lose, access to private
markets, then Moody's would most likely implement a downgrade,
potentially of multiple notches.
In addition to the confirmation of Spain's sovereign ratings,
the rating agency has today also confirmed the Baa3/Prime-3 ratings
of the Fund for Orderly Bank Restructuring (Fondo de Reestructuración
Ordenada Bancaria or FROB) and assigned a negative outlook. Spain's
local and foreign-currency bond and deposit ceilings remain unchanged
at A3.
RATINGS RATIONALE
RATIONALE FOR CONFIRMING THE Baa3 RATING
Moody's decision to confirm Spain's Baa3 sovereign rating
is primarily driven by the developments in the euro area policy framework
since mid-June (when Moody's initiated its review of Spain's
ratings), which support the Spanish government's ability to
refinance maturing debt with private investors. Specifically,
Moody's believes that the government will likely ask for an Enhanced
Conditions Credit Line (ECCL) from the ESM as a prerequisite for the ECB
activating its OMT program in relation to Spanish government debt.
Moody's believes the ECB's willingness to act to contain volatility
in Spanish government bond yields will reduce the risk of loss of market
access for the Spanish sovereign for the foreseeable future. The
rating agency places only limited weight on the ability of a backstop
ESM facility -- the size of which would, on its own,
be insufficient to support debt issuance for a lengthy period --
to sustain investor confidence. Moody's views positively
(i) the stricter and more timely surveillance of Spain's program
implementation that would accompany an ESM program, and (ii) the
possible involvement of the International Monetary Fund (IMF) which would
provide an independent assessment of program implementation. Moody's
would expect easier funding conditions to continue to filter through to
other Spanish borrowers, thereby potentially easing the current
lack of available credit that is hampering economic growth.
The second driver underlying today's announcement is evidence of
the Spanish government's commitment to implement the fiscal and
structural reform measures that are needed to reverse its debt trajectory.
Ultimately, the Spanish government's ability to refinance
maturing debt will depend on the credibility of its efforts to reduce
its large fiscal deficit and reverse the rising public debt trajectory.
The government has taken significant fiscal measures since coming into
office, including structural reforms in the areas of healthcare
and education, as well as measures to reduce the public-sector
wage bill and improvements in the budgetary framework for the regions.
The unfavourable economic outlook constitutes the most significant risk
to the government's fiscal objectives and Moody's continues
to expect some, albeit relatively limited, deviation from
the budget deficit plans. Nevertheless, the rating agency's
central expectation is that the government will succeed in gradually reducing
the budget deficit over the coming years and begin the process of stabilising
and eventually reversing the debt trajectory.
The third driver of the confirmation of Spain's ratings is the progress
being made towards the restructuring and recapitalisation of the banking
system. While below the rating agency's own estimate of a
capital shortfall of EUR100 billion for the system, the more than
EUR50 billion capital needs that resulted from the recent independent
stress tests will enhance the solvency of the affected banks and should
help to restore market confidence in Spain's banking system as a
whole.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook on Spain's confirmed Baa3 rating reflects Moody's
view that the risks to its baseline scenario are high and skewed to the
downside. Risks to the economic outlook in Spain are significant,
with repeated downward revisions of the country's growth forecasts
over the past year. Further downward revisions could have significant
negative implications for the government's ability to bring its
public finances back onto a sustainable path and reverse its debt trajectory.
Moody's current baseline expectation is a resumption of growth in
2014, based mainly on the expectation of renewed growth in Spain's
core EU markets and hence continued positive export performance.
Crucially, Moody's fiscal forecasts of a gradual reduction
in the general government's budget deficit (to around 4.5%
of GDP by 2014) are based on the expectation of a gradual and moderate
recovery in economic growth. Should growth appear likely to weaken
further still, Moody's would need to reassess the government's
ability to achieve its fiscal objectives.
In addition, the central government continues to depend on the regional
governments to contribute their part of the required fiscal consolidation.
Despite measures to improve central control over the regions and the regions'
progress with implementing important measures to restrain their spending,
Moody's still expects some slippage from regional-level fiscal
targets in aggregate. Should the measures taken prove less effective
than intended, Moody's would reassess the consequences for
the central government's programme.
Moody's observes that the wider European environment remains fragile.
The ECB's OMT announcement has bought time for the euro area authorities
to push forward the broader financial, fiscal and economic reforms
that are needed to address the institutional flaws that led to the crisis
and to avoid further shocks to the financial system. However,
there is significant uncertainty around the limits on the ECB's
willingness to undertake debt purchase operations on a large scale.
Moreover, while progress continues to be made, the future
path of policy remains very unclear. For example, while the
proposed euro-wide banking union is a potentially significant step
toward integration of financial regulation, the continued clear
tensions between member states have the potential to materially slow down
the process. Also, the possible exit of Greece from the euro
area remains a risk and further source of contagion.
Overall, Moody's assessment assumes that the Spanish government
will continue to be able to refinance its maturing debt at affordable
rates. Should any of the factors listed above lead the rating agency
to conclude that the Spanish government had either lost, or was
very likely to lose, access to private markets, then Moody's
would need to reassess its debt rating.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's would downgrade Spain's rating if its current expectations
regarding euro area and ECB support were to fail to materialise,
or if the Spanish government failed to implement the necessary fiscal
and other reform measures.
In view of the currently negative outlook on Spain's sovereign rating,
no upward rating movement is likely over the short term. However,
Moody's would consider returning the outlook on Spain's rating
to stable if the pace and strength of the country's economic recovery
were to exceed Moody's current expectations.
The principal methodology used in these ratings was Sovereign Bond Ratings
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.
The ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings 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.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
the two years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided
to entities rated by MIS's EU credit rating agencies" on the
ratings disclosure page on our website www.moodys.com for
further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%)
and for (B) further information regarding certain affiliations that may
exist between directors of MCO and rated entities as well as (C) the names
of entities that hold ratings from MIS that have also publicly reported
to the SEC an ownership interest in MCO of more than 5%.
A member of the board of directors of this rated entity may also be a
member of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
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.
In addition to the information provided below please find on the ratings
tab of the issuer page at www.moodys.com, for each
of the ratings covered, Moody's disclosures on the lead rating
analyst and the Moody's legal entity that has issued each of the
ratings.
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.
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Moody's confirms Spain's government bond rating at Baa3/(P)P-3, assigns negative outlook
