NOTE: On June 22, 2012 the press release was revised as follows: Correct the sixth paragraph to add the following: "Short-term ratings were also placed on review for possible further downgrade." Revised release follows.
London, 13 June 2012 -- Moody's Investors Service has today downgraded Spain's government
bond rating to Baa3 from A3, and has also placed it on review for
possible further downgrade. Moody's expects to conclude the
review within a maximum timeframe of three months.
The decision to downgrade the Kingdom of Spain's rating reflects the following
key factors:
1. The Spanish government intends to borrow up to EUR100 billion
from the European Financial Stability Facility (EFSF) or from its successor,
the European Stability Mechanism (ESM), to recapitalise its banking
system. This will further increase the country's debt burden,
which has risen dramatically since the onset of the financial crisis.
2. The Spanish government has very limited financial market access,
as evidenced both by its reliance on the EFSF or ESM for the recapitalisation
funds and its growing dependence on its domestic banks as the primary
purchasers of its new bond issues, who in turn obtain funding from
the ECB.
3. The Spanish economy's continued weakness makes the government's
weakening financial strength and its increased vulnerability to a sudden
stop in funding a much more serious concern than would be the case if
there was a reasonable expectation of vigorous economic growth within
the next few years.
Moody's has today also downgraded the rating of Spain's Fondo de
Reestructuración Ordenada Bancaria (FROB) to Baa3 from A3 and placed
the rating on review for possible further downgrade, in line with
the sovereign rating action. The FROB's debt is fully and
unconditionally guaranteed by the government of Spain. Moreover,
the provisional short-term rating of the Spanish government has
today also been downgraded to (P)Prime-3 from (P)Prime-2.
Similarly, FROB's short-term rating was lowered to P-3
from P-2.
The review for downgrade will focus on the outcome of the ongoing external
audits of the Spanish banking system, the conditionality and details
of the EFSF/ESM loan agreement, and the specific execution strategy
developed for the banking system's recapitalisation. Moody's
will also consider any further initiatives at the euro area level.
In addition, Spain's rating -- as well as the ratings
of other euro area countries -- could be adversely affected if the
risk of a Greek exit from the euro area were to rise further. Short-term ratings were also placed on review for possible further downgrade.
RATINGS RATIONALE
The first key driver underlying Moody's three-notch downgrade
of Spain's government bond rating is the government's decision
to seek up to EUR100 billion of external funding from the EFSF or ESM.
A formal request will be presented shortly, but the euro area finance
ministers announced on 10 June their willingness to accede to that request.
The sum of EUR100 billion is twice the size of Moody's previous
base case estimate, and in line with the rating agency's adverse
case estimate.
While the details of the support package have yet to be announced,
it is clear that the responsibility for supporting Spanish banks rests
with the Spanish government. EFSF funds will be lent to the government
which will use them to recapitalise Spanish banks. This borrowing
will materially worsen the government's debt position: Moody's
now expects Spain's public debt ratio to rise to around 90%
of GDP this year and to continue rising until the middle of the decade.
Stabilising the ratio will be a key challenge for the Spanish authorities,
requiring years of continued fiscal consolidation. As a consequence,
the government's fiscal and debt position is no longer commensurate
with a rating in the A range or even at the top of the Baa range.
The second driver of today's rating action is the Spanish government's
very limited financial market access, as evidenced both by its reliance
on the EFSF or ESM for the recapitalisation funds and its growing dependence
on its domestic banks as the primary purchasers of its new bond issues,
who in turn require funding from the ECB to purchase these bonds.
In Moody's view, this is an unsustainable situation.
In the absence of positive developments that shore up investor sentiment,
such as a resumption of growth or rapid progress in achieving fiscal consolidation
objectives, neither of which is likely in the current environment,
the government is likely to become increasingly constrained with regard
to the terms under which it is able to refinance maturing debt.
If unchecked, Moody's believes that the risk of the government
losing access to private debt markets on affordable terms and needing
to seek direct support from the EFSF/ESM will continue to rise.
Given the experience with private-sector involvement (PSI) in Greece
and the intentions expressed by euro area officials around the development
of the ESM, Moody's believes that the debts of euro area sovereigns
that are fully dependent upon official sources to fund their borrowing
requirements represent speculative-grade risk. Support would,
if needed for a sustained period, be likely to be made conditional
on loss-sharing with private investors or in extremis withdrawn
altogether.
Moody's action to place the government's rating one notch
above speculative grade reflects the rating agency's view that Spain
has moved much closer to needing to seek direct support from the EFSF/ESM,
and therefore much closer to being positioned within speculative grade.
Moody's decision to leave the government's rating in investment
grade reflects the underlying strength of the Spanish economy and the
government's clear desire to reverse the debt trajectory through
a strong fiscal consolidation programme. Moody's also acknowledges
several factors that differentiate the current programme from the support
packages extended to Ireland, Portugal and Greece. In particular,
the size of the support package is significantly smaller than it is in
the other cases. The maximum amount of EUR100 billion equates to
around 10% of Spain's GDP, compared with more than
54% of GDP in the case of Ireland, 114% of GDP in
Greece and 46% of GDP in Portugal. Moody's therefore
also considers the issue of subordination of bondholders to the senior
creditor EFSF/ESM to be less of a negative factor. Senior creditors
account for 37% and 40% of total public debt in Ireland
and Portugal, while the respective share in Spain is 11%
(in case the maximum amount was drawn).
FOCUS OF THE RATING REVIEW
Moody's has today also placed Spain's Baa3 government bond
rating on review for possible further downgrade in order to assess the
implications of several factors on the Spanish government's ability
to continue to fund its borrowing requirements in the private debt markets.
These factors are as follows:
- The clarification of the remaining open questions regarding the
size and terms of the banking support package.
- The ultimate size of the government's liability following
the results of the independent valuations and audits of all the Spanish
banks, which are expected on 31 July.
- Any further initiative at the euro-area level, in
particular those relating to steps towards a fiscal and banking union.
- The impact of the banking support package on Spain's ability
to restore market confidence in the banking sector and by extension in
the government bond market.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Sovereign Bond Ratings
Methodology 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,
public information, and confidential and proprietary Moody's Investors
Service 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
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Kathrin Muehlbronner
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
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SUBSCRIBERS: 212-553-1653
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Moody's downgrades Spain's government bond rating to Baa3 from A3, on review for further downgrade
