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Rating Action:

Moody's downgrades Basque Country, Guipuzcoa and Bizkaia ratings to Aa1 from Aaa; negative outlook

Global Credit Research - 17 Dec 2010

Madrid, December 17, 2010 -- Moody's Investors Service has today downgraded the issuer and debt ratings of the Basque Country as well as the issuer ratings of the Diputación Foral de Guipuzcoa and Bizkaia by one notch to Aa1 from Aaa. The outlooks are all negative.

RATINGS RATIONALE

"The rating actions taken today reflect the decline in the three Basque entities' financial performance over the past three years, which heightened in 2010 with a sustained deterioration in operating results and a subsequent rapid recourse to debt," says Sebastien Hay, a Vice President and Senior Credit Officer in Moody's sub-sovereign team. In this context, Moody's believes that the expected financial performance of the Basque entities in the coming years - whose operating results and debt metrics are unlikely to return to pre-crisis levels - is no longer compatible with their Aaa-rated international peers. The new Aa1 rating for the Basque Region and its provinces encapsulates this expected deterioration in their debt trajectory, which is likely to reach 72% of total consolidated operating revenue by year-end 2011 (excluding the Province of Alava, which is not rated by Moody's).

According to Moody's, the negative outlooks assigned to the Basque region and provinces are based on the recent review for possible downgrade of the Spanish sovereign, which signals sluggish GDP growth prospects for the country as a whole, and which is likely to continue to affect the Basque tax base in the medium-term. The outlook also takes into account that the borrowing needs for 2011 remain manageable for the Basque region and modest for the provinces, but that the persistance of currently difficult market conditions might lead to higher debt service, possibly affecting the Basque entities' operating results.

A return to a stable outlook would require additional tax revenue which would support better-than-forecast debt trajectory in future. In this regard, Moody's notes that the Basque entities currently grant generous tax exemptions -- a policy which, if scaled back, could yield substantial additional tax proceeds, if necessary. A stabilised outlook would also require better overall financial results than those currently envisaged by Basque administrations.

Below is a detailed list of rating changes that Moody's has implemented today and the accompanying specific rationales:

BASQUE COUNTRY

Moody's has downgraded the Basque country's long-term issuer and debt ratings to Aa1 from Aaa, with a negative rating outlook. The downgrade was prompted by the rapid deterioration in the region's budgetary performance in recent years and Moody's expectation that this trend will continue over the medium term. Moody's notes the rapid increase in the Basque Country's traditionally low net direct and indirect debt stock in recent years to 45% of operating revenue at year-end 2009. The rating agency expects that this will rise above 60% in 2010 in order to cover the forecast deficit of around 20% of its operating revenue, according to 2010 estimated results. "Looking further ahead, the Basque country's preliminary budget for 2011 forecasts a budget deficit of approximately EUR1 billion and a continued high financing deficit of 11.5% of operating revenue for the year, which will lead the region to increase its net direct and indirect debt levels to almost 70% of its budgeted operating revenue," notes Marisol Blazquez, an analyst in Moody's sub-sovereign team.

DIPUTACIÓN FORAL DE GUIPUZCOA

Moody's has downgraded the long-term issuer rating of Guipuzcoa to Aa1 from Aaa, with a negative rating outlook. Although Guipuzcoa continues to show good financials -- as evidenced by the continued positive operating results as well as moderate debt ratios -- the province's budgetary performance has deteriorated rapidly in recent years. Moody's notes that its revenue should remain strained in 2010, with Guipuzcoa estimating its financing deficit at around 18% of its operating revenue and its net direct and indirect debt-to-operating-revenue ratio at around 50%, which is a significant rise from 20% in 2008 (all ratios calculated discounting collected and redistributed taxes). However, in line with the province's latest forecast, the rating agency anticipates a good recovery in tax collection rates in 2011, reflected in an improvement in its budgeted financing deficit to 7% of operating revenue and a net direct and indirect debt-to-operating revenue ratio increasing to a contained level between 55% and 60%.

DIPUTACIÓN FORAL DE BIZKAIA

Moody's has downgraded the long-term issuer rating to Aa1 from Aaa, with a negative rating outlook. The downgrade is driven by the weakening of the province's financial performance in recent years, largely given the 16% decline in tax collection between 2008 and 2009, and the maintenance of high levels of capital expenditure. These factors led the province to release a large financing deficit of 12% of operating revenue in 2009. For 2010, the trend is expected to slightly improve with deficit expected at 9% of operating revenue (discounting collected and redistributed taxes to the Basque Country) which the province projects will increase its net direct and indirect debt stock by roughly 18% in comparison with 2009 (to EUR1.1 billion). For 2011, Moody's expects enhanced performance, but still resulting in a 4% financing deficit bringing debt to 90% of operating revenues.

Moody's previous rating actions for these three entities were implemented on 5 October 2010, when the rating agency placed on review for possible downgrade the Aaa ratings of the Basque Country, Diputación Foral de Guipuzcoa and Diputación Foral de Bizkaia.

The principal methodologies used in this rating were Regional and Local Governments Outside the US published in May 2008, and The Application of Joint Default Analysis to Regional and Local Governments published in December 2008.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit 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 ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Madrid
Marisol Blazquez
Analyst
Sub-Sovereign Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Thomas Amenta
Senior Vice President
Sub-Sovereign Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Madrid
Sebastien Hay
VP - Senior Credit Officer
Sub-Sovereign Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Espana, S.A.
Barbara de Braganza, 2
Madrid 28004
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Basque Country, Guipuzcoa and Bizkaia ratings to Aa1 from Aaa; negative outlook
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