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Rating Action:

Moody's downgrades five Spanish regions; outlooks negative

 The document has been translated in other languages

01 Jul 2010

Madrid, July 01, 2010 -- Moody's Investors Service has today downgraded to Aa2 from Aa1 the Spanish regions of Castilla-y-Leon, Extremadura, Madrid and Murcia. Moody's has also downgraded to Aa3 from Aa2 the rating of the region of Castilla-La-Mancha. The outlook for all of these regions remains negative. The review for downgrade of Spain's sovereign rating reflects the fragility of the country's medium-term economic recovery prospects; this factor is captured in the negative outlooks assigned to all Spanish regions.

The rating actions taken today reflect Moody's expectation of a lasting impairment of the regions' financial performances. Given the pace and the magnitude of this deterioration, their relative budget position against international peers is weakening. Indeed, the regions' significant fall in tax revenue expected in 2010-2011 will have a recurrent impact on their financing deficits over the next few years. In our opinion, this trend, together with the subsequent rapid recourse to debt, will be difficult to curb given weak economic growth anticipated over the next few years.

The national government's decisions to implement important measures in order to reduce public deficits (e.g. salary cuts and some measures in the healthcare sector) will also apply to the regions, thus helping them to reach their collective deficit reduction objective of EUR11 billion between 2010 and 2011. In addition, with the view to heighten its surveillance, the national government will now authorise regions' long-term debt plans in accordance with these deficit limits. Moody's believes that the basis for reaching these deficit targets will depend largely on a rebound in tax revenue in 2010-2011, a highly uncertain scenario given the weak economic outlook for the next few years; it will also depend on the efficiency of the individual cost-cutting plans on which many regions have recently embarked.

According to Moody's base-case scenario, the rated Spanish regions will increase their debt levels in 2010 and 2011, leading to a rise in the average debt-to-operating revenue to approximately 100% in 2011 (from 54% at year-end 2008). In order to assess the efficiency of savings measures, Moody's will monitor the execution of regional budgets in 2010 and preliminary budgets for 2011 released by year end; this will help us to assess the need for further rating actions.

In accordance, Moody's has made the following rating changes:

CASTILLA-LA MANCHA, JUNTA DE COMUNIDADES DE

The long-term issuer and debt ratings are downgraded to Aa3 from Aa2, with the outlook remaining negative. The downgrade is based on a significant deterioration in the region's operating performance that is anticipated in 2010, which would increase its financing deficit and debt metrics. Sustained losses in indirect taxes together with rigid operating expenses have led to a negative gross operating balance and a significant increase in the region's deficit in 2009 (17% of operating revenue), which under European accountability rules largely exceeded the target of 1% of regional GDP established by the country's Budget Stability Law. As a result, Moody's believes that Castilla-La Mancha will be under pressure to record its target rates of 2.4% and 1.3% of regional GDP for 2010 and 2011, respectively, which were established by the central government. Moody's future assessments of Castilla-La Mancha's credit quality will consider the time-scale and extent of financial pressures and the steps taken to address current budget imbalances in a timely manner.

CASTILLA Y LEON, JUNTA DE

The long-term issuer and debt ratings are downgraded to Aa2 from Aa1, with the outlook remaining negative. The downgrade is based on a significant decline in the region's finances anticipated in 2010. This reflects the region's own expectations in its initial budget for 2010 of an increase in its financing deficit from that recorded in 2009 and a substantial rise in the region's net direct and indirect debt stock to around 50% of its operating revenue from 33% in 2009. Moody's future assessments of Castilla y Leon's credit quality will consider the time-scale and extent of financial pressures and the steps taken to address current budget imbalances in a timely manner.

EXTREMADURA, JUNTA DE

The long-term issuer rating is downgraded to Aa2 from Aa1, with the rating outlook remaining negative. The downgrade is based on a rapid deterioration in the region's operating performance expected in 2010, with the region forecasting almost nil gross operating balance and a deterioration in its deficit to around 10% of operating revenue from -6% recorded at year-end 2009. As a result, Extremadura's debt stock is expected to increase by around EUR400 million in 2010, meaning that the region's direct and indirect debt-to-operating revenue ratio will rise to around 35% from 24% recorded in 2009. While the debt ratio remains low, there are uncertainties surrounding the 2011 fiscal year, in a context where the region is more dependent on operating and capital transfers than other Spanish regions. Future assessments of Extremadura's credit quality will consider the time-scale and extent of financial pressures and the steps taken to address current budget imbalances in a timely manner.

MADRID, COMUNIDAD AUTÓNOMA DE

The long-term issuer rating is downgraded to Aa2 from Aa1, with the rating outlook remaining negative. The downgrade is based on an expected deterioration in the region's operating performance in 2010. Madrid is the only region to have complied with 2009's deficit-to-GDP objective. Measured against operating revenue its gross operating balance is expected at -1% in 2010 and its financing deficit is expected at around 9% (6% in 2009). This will, in turn, cause a rapid increase in the ratio of net direct and indirect debt-to-operating revenue to around 80%, from 68% estimated for 2009. Moody's future assessments of Madrid's credit quality will consider the severity and time-scale of financial pressures and the steps taken to address current budget imbalances in a timely manner.

MURCIA, COMUNIDAD AUTÓNOMA DE

The long-term issuer and debt ratings are downgraded to Aa2 from Aa1, with the rating outlook remaining negative. The downgrade reflects a deterioration in the region's forecasted operating performance in 2010, as evidenced by a decline in its gross operating balance-to-operating revenue ratio to around -8% forecasted in its 2010 budget, from a positive gross operating balance of 4.5% in its 2009 realised budget. At the same time, the autonomous community expects an increase in its deficit for 2010 to around 17% of operating revenue from 6.4% in 2009, caused largely by pressure on some spending items in its budget (including healthcare) and a sustained decrease in operating revenue. This will increase the region's moderate ratio of net direct and indirect debt-to-operating revenue of 34% in 2009 to around 55% in 2010. Moody's future assessment of Murcia's credit quality will consider the time-scale and extent of financial pressures and the steps taken to address current budget imbalances in a timely manner.

The last rating actions on the five regions were implemented by Moody's as follows:

Castilla-La Mancha: Long-term issuer and debt ratings downgraded to Aa2/negative from Aa1/negative on 17 December 2009.

Castilla y Leon: Long-term issuer and debt ratings affirmed at Aa1; outlook changed to negative from stable on 17 December 2009.

Extremadura: Long-term issuer rating affirmed at Aa1; outlook changed to negative from stable on 17 December 2009.

Madrid: Long-term issuer rating affirmed at Aa1; outlook changed to negative from stable on 31 July 2009.

Murcia: Long-term issuer rating affirmed at Aa1; outlook changed to negative from stable on 31 July 2009.

The principal methodologies used in rating the Spanish regions were "Regional and Local Governments Outside the US" and "The Application of Joint Default Analysis to Regional and Local Governments ", published respectively in May 2008 and December 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

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

London
David Rubinoff
Managing Director
Sub-Sovereign Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades five Spanish regions; outlooks negative
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