Moody's Place Spain's Aaa Sovereign Rating On Review For Downgrade
Always late Moody's is that last rating agency to have Spain at the perfect (Aaa) rating on the country. Moody's cites challenges Spain faces to achieve fiscal targets.
London, 30 June 2010 -- Moody's Investors Service has today placed
Spain's Aaa local and foreign
currency government bond ratings on review for possible downgrade.
Moody's decision to initiate this review was prompted by (1) the
deteriorating (short-term and long-term) economic growth
prospects; (2) the challenges the government faces in achieving its
fiscal targets; and (3) concerns over the impact of rising funding
costs over the medium term.
If at the conclusion of the review, Spain's ratings are lowered,
it would most likely be by one, or at most two, notches,
according to Moody's. The rating agency intends to conclude
its review within a three-month period.
The Spanish government's Prime-1 short-term rating is not
affected by this review. Spain's falls under the Eurozone's Aaa
regional ceilings, which are not affected by the review of the Spanish
RATIONALE FOR REVIEW
"Spain's growth prospects are weaker than those of other Aaa-rated
sovereigns," says Kathrin Muehlbronner, a Moody's
Vice President -- Senior Analyst and lead analyst for Spain.
In the short term, the government's accelerated fiscal consolidation
combined with the higher borrowing costs currently facing the
consumers, and businesses will likely depress growth.
From a longer-term perspective, it will take several years
for the economy to adjust to the fallout from the collapse of the
boom, to reduce the high level of private sector indebtedness to
levels more in line with other EU countries, and to find new,
internal sources of economic growth. Accordingly, Moody's
now expects GDP growth to average just slightly above 1% over the
entire 2010-2014 period.
The weaker growth trajectory in turn complicates an already very
fiscal consolidation programme. "Moody's believes that
more fundamental adjustments to key spending items will be required in
order to achieve the government's budget deficit targets,"
says Ms Muehlbronner. Moody's own forecasts for Spain's
fiscal deficits are higher than the government's targets. According
to Moody's projections, Spain's debt-to-GDP
ratio is likely to rise to about 80% by 2014.
Moody's noted that the government's efforts to put forward
structural reforms -- in the labour market, the banking sector
and potentially also the pension system -- are positive developments
that could help revive Spain's growth potential in the medium term.
These proposals, however, have yet to restore investor confidence.
As a result, the government's funding costs remain elevated
and its debt affordability ratio (the ratio of interest on the debt to
government revenues) is likely to become increasingly out of line with
those of other top-rated countries over time.
FACTORS TO BE CONSIDERED IN THE REVIEW
The review of Spain's sovereign rating will assess the broader political
commitment to structural reform and the likelihood that the reforms
by parliament will be far-reaching enough to significantly stimulate
long-term growth. Specifically, Moody's will
also review Spain's upcoming 2011 budget plan, due to be presented
in September, to assess whether the deficit target for 2011 can
be achieved. The rating agency will also consider the contribution
from the country's regional and local governments towards the fiscal
The outcome of the review could also be affected if the costs of
Spain's banking sector, which Moody's currently believes
to be manageable, were to turn out to be much larger than expected.
For further information, please see Moody's Special Comment "Key
Drivers of Decision to Review Spain's Aaa for Possible Downgrade"
available on www.moodys.com.
PREVIOUS RATING ACTION & METHODOLOGY
Moody's last rating action affecting Spain was implemented on 29
July 2009, when the rating agency affirmed Spain's Aaa local and
foreign currency government bond ratings and their stable outlook.
The last rating action on Spain prior to that was taken on 24 May 2006,
when the rating agency affirmed the Aaa foreign and domestic currency
country ceilings of the Eurozone. Prior to that, the last
rating action on Spain was implemented on 13 December 2001, when
Moody's raised the government's local and foreign currency bond ratings
to Aaa with a stable outlook from Aa2/positive.
The principal methodology used in rating the government of Spain is
Sovereign Bond Methodology", published in 2008, which
can be found at 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
on Moody's website.