October 18, 2011 5:16 PM EDT
http://www.streetinsider.com/Credit+Ratings/Moodys+Cuts+Spain+Govt+Bond+Ratings+to+A1%3B+Outlook+Negative/6865419.html
Moody’s Investors Service Tuesday downgraded Spain’s government bond ratings to A1 from Aa2. This rating action concludes the review for possible downgrade that Moody’s had initiated for Spain’s rating on 29 July. The ratings carry a negative outlook.
The main drivers that prompted the rating downgrade are as follow:
Spain continues to be vulnerable to market stress and event risk.
Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged and it will in any event take time for confidence in the area’s political cohesion and growth prospects to be fully restored. In the meantime, Spain’s large sovereign borrowing needs as well as the high external indebtedness of the Spanish banking and corporate sectors render it vulnerable to further funding stress.
The already moderate growth prospects for Spain have been scaled back further in view of (i) the worsening global and European growth outlook and (ii) the difficult funding situation for the banking sector and its impact on the wider economy. Specifically, Moody’s now expects Spain’s real GDP growth in 2012 to be 1% at best, compared with earlier expectations of 1.8%, with risks mainly to the downside. Over the following years, the rating agency continues to expect a very moderate pace of growth of around 1.5% on average per annum.
Lower economic growth in turn will make the achievement of the ambitious fiscal targets even more challenging for Spain. Moody’s expects the budget deficits for the general government sector to be above target both this year and next. In particular, Moody’s continues to have serious concerns regarding the funding situation of the regional governments and their ability to reduce their budget deficits according to targets.
These were the main reasons for placing the ratings of the Kingdom of Spain under review on 29 July 2011 and the key areas that Moody’s considered during the review period. Since that time, funding challenges for sovereign-related credits as well as uncertainties about the specifics of future euro area support, and about near-term economic growth (and hence the likelihood of further deficit reduction) have increased rather than abated. The credit strengths, on the other hand, have been largely unchanged.
Today’s rating action on Spain follows Moody’s recent rating actions on the sovereign ratings of Italy (A2, negative outlook) and Belgium (Aa1, rating on review for possible downgrade), which were driven by similar concerns.
Moody’s is maintaining a negative outlook on Spain’s rating to reflect the downside risks from a potential further escalation of the euro area crisis. The rating agency expects that the next government to emerge after Spain’s parliamentary elections on 20 November will be strongly committed to continued fiscal consolidation. Spain’s rating would face further downward pressure if this expectation did not materialise. On the other hand, the implementation of a decisive and credible medium-term fiscal and structural reform plan coupled with a convincing solution to the euro area crisis would trigger a return to a stable outlook.
