Moody's Put Spain's Aa1 Rating On Downgrade Review, EURUSD Meets Gravity

Tyler Durden's picture

EURUSD kneejerk reaction on Moody's announcement shows a downward acceleration of 9.8 m/s2:

Moody's puts Spain's Aa1 ratings on review for possible downgrade

Short-term ratings are affirmed at P-1; FROB's Aa1 rating also placed on review for possible downgrade

London, 15 December 2010 -- Moody's Investors Service has today placed Spain's Aa1 local and foreign currency government bond ratings on review for possible downgrade.

The main triggers for placing the rating on review for possible downgrade are:

(1) Spain's vulnerability to funding stress given its high refinancing needs in 2011. This vulnerability has recently been amplified by fragile market confidence.

(2) A potential further increase in the public debt ratio should the cost of bank recapitalisation prove to be higher than expected so far, whether to meet higher-than-expected asset impairments or simply to retain the confidence of the wholesale markets.

(3) Increased concerns over the ability of the Spanish government to achieve the required sustainable and structural improvement in general government finances given the limits of central government control over the regional governments' finances.

Moody's has also placed the Aa1 rating of Spain's Fondo de Reestructuración Ordenada Bancaria (FROB) on review for possible downgrade as the FROB's debt is fully and unconditionally guaranteed by the government of Spain. No further ratings or outlooks have been changed as part of today's rating action.

"Moody's believes that the above-mentioned downside risks warrant putting Spain's rating under review for downgrade", says Ms Muehlbronner, Moody's Vice President and lead analyst for Spain. "However, Moody's also wants to stress that it continues to view Spain as a much stronger credit than other stressed Euro zone countries. This is reflected in the significantly higher rating for the Spanish sovereign. Moody's review will therefore most likely conclude that Spain's rating will remain in the Aa range."


"Moody's does not believe that Spain's solvency is under threat, and in its base case assumptions does not expect the Spanish government to have to ask for EFSF liquidity support. However, Spain's substantial funding requirements, not only for the sovereign but also for the regional governments and the banks, make the country susceptible to further episodes of funding stress. This is one of the drivers behind the review for possible downgrade," says Kathrin Muehlbronner.

The Spanish government will need to raise approximately EUR170 billion (including Treasury Bill roll-over requirements) in 2011, even after taking into account the potential revenues from the recently announced privatizations. In addition, regional governments have refinancing needs of around EUR 30 billion next year. Moreover, the Spanish banks, whose own funding capacity partly depends on the fortunes of the Spanish sovereign, have around EUR90 billion worth of term debt to refinance in 2011.

Moody's notes that these needs are now rendered more challenging by the fragile confidence of international capital markets. Over the past few years, foreign investors have typically funded around 50% of Spain's overall funding requirements. However, they may be less willing to do so in the immediate future given recent speculation about the treatment of bondholders should Spain be pushed to seek support from the EU/IMF. In a base case scenario, Moody's expects the sovereign to be able to raise the necessary financing. However, ongoing higher funding costs would strain Spain's debt affordability further beyond current expectations and could also negatively impact the availability and cost of credit to the wider economy, which remains vulnerable.

Secondly, Moody's is also in the process of reassessing its assumptions regarding the potential cost to the government of recapitalizing the country's savings banks. Under base case assumptions, the rating agency continues to expect relatively moderate recapitalization needs of around EUR25 billion if the banks are to retain Tier 1 capital ratios of 8%, which the FROB has already provided EUR10.5 billion. However, in a more stressed scenario, recapitalization needs could increase to at least EUR80 billion. If a higher capital standard -- of as much as 12% Tier 1 capital -- for banks wishing to raise term funding is applied, even under base case assumptions regarding future loan losses, Moody's believes that such a requirement would necessitate an additional EUR90 billion of capital.

Thirdly, Moody's remains concerned about the ability of the Spanish government to engineer the necessary structural improvement in general government finances over the next 3-4 years. These concerns mainly relate to the commitment of the regional governments to control their spending and the central government's ability to enforce fiscal discipline at the regional level. Moody's believes that the recent, rather timid, steps to improve transparency will not address the fundamental problem of a lack of fiscal discipline. Several regional governments appear likely to miss even the relatively unchallenging budget targets posed for this year, and most are expected to achieve next year's targets by severely cutting their capital expenditure programs, which Moody's does not consider to be a sustainable policy. There are no policy initiatives to reduce their structural spending pressures in the areas of healthcare and education. In addition, the central government lacks effective powers to restrict the regions' debt issuance in case of non-compliance, and two regions are accumulating commercial debts which are not subject to the debt authorization rule. Moody's also notes the repeated delays to table important structural reforms like pension reforms and changes to the collective bargaining system. These delays have raised doubts about the commitment and ability of the Spanish government to implement the far-reaching structural reforms that are needed to return the economy to a stronger and sustainable growth path.


Moody's review of Spain's sovereign rating will focus on the central government's ongoing commitment to address the key structural challenges of the Spanish economy, in particular whether the government will indeed pursue the implementation of announced and planned structural reforms like the pension and collective bargaining reforms. The review will also assess the likelihood of the regional governments achieving structural and lasting fiscal improvements as well as the commitment of the central government to increasing the transparency and oversight of the regional government accounts. Moreover, Moody's will again review the potential for the costs of recapitalizing Spain's banking sector to be larger than currently expected, whether to meet higher-than-expected asset impairments or simply to retain the confidence of the wholesale markets. Moody's will also assess its ratings on the Spanish banks in the coming days in response to today's rating action on the sovereign.

In addition, any broader developments in the Eurozone, in particular with regard to the design of the envisaged permanent crisis mechanism, could also be important determinants of the outcome of Moody's rating review. Moody's will focus in particular on the likely effect on market access and the cost of funding for the Spanish government and other issuers in the country, as well as the impact this may have on the government's debt metrics.


Moody's last rating action affecting Spain was implemented on 30 September 2010, when the rating agency downgraded Spain's Aaa government bond ratings to Aa1 with a stable outlook. The rating action prior to that was taken on 30 June 2010, when the rating agency placed Spain's Aaa ratings on review for possible downgrade.

Moody's last rating action affecting FROB was implemented on 30 September 2010, when the rating agency downgraded the FROB's rating to Aa1/stable from Aaa/review for possible downgrade. This action followed the same rating action on the government of Spain, which provides a full guarantee on the senior unsecured debt issued by FROB.

The principal methodology used in rating the government of Spain is Moody's "Sovereign Bond Methodology", published in 2008, which can be found at Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

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 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 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 for further information.

Please see the Credit Policy page on for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Spalding_Smailes's picture
....."New general strike hits Greece

A new general strike hit Greece on Wednesday, grounding flights and disrupting hospital and transport services as unions protested against freshly approved labour reforms amid painful austerity and rising unemployment.

Security is tight in central Athens, where two separate demonstrations are planned. Previous protests have been marred by violence, and in May three people died in a bank torched by rioting demonstrators.

The new general strike is the seventh organised this year by unions appalled at a wave of austerity measures meant to pull Greece out of its worst financial crisis since the Second World War.

All air, rail and ferry services have been cancelled, while traffic in Athens is being severely disrupted as public transport workers and taxi drivers walk off the job for hours. Journalists are also holding a 24-hour strike, causing TV, radio and internet news blackouts, and newspapers will not be published on Thursday."........

dlmaniac's picture

The way TLT free falls, they need every gimmick and some to stop the bleeding. Makes you wonder what they are gonna do when they are unable to send in the PIIGS clowns (some time next year)?

Reggie Middleton's picture

Remember who brought this to attention first. The ratings agencies are perenially behind the curve and they warn after the money is lost. Personally, I don't feel Spain has recieved the attention its fiscal situation deserves. Its banks are in a worse situation than most percieve, and its state's fiscal situation has deteriorated quite rapidly. As excerpted from


Spain’s Government Officials Have Apparently (a polite way of saying unkonwingly) Declared That The Country Is On The Path To Crisis

There is no hard an set formulaic equation or template to indicate whether a country is going to default or not from a historical perspective, save one. Each and every recent historical default was the result of a very rapid increase in public debt to GDP, often after a banking or credit crisis and deterioration in both public finances and access to private debt markets. This has Spain’s (or any nation in the area, it is literally a game of pick a PIIGS) name written all over it. Here is the historical and projected Debt/GDP numbers using the Spanish Government’s projections (not our scrubbed for reality calculations):

Higher debt paired with reduced market access typically generated debt servicing difficulties, ultimately culminating in either default or the urgent need for a preemptive restructuring to avoid a default.

Source: IMF

BTW, London Banker (below), who used to blog on Roubini's site is a very sharp fellow.  How are you doing , my friend?

jdoo's picture


Love your comments but there are 3 typos in that graph...

Chris Jusset's picture

jdoo wrote:

"Reggie, Love your comments but there are 3 typos in that graph..."

LOL.  But it's a damn good graph, even with the 3 typos ...

Dismal Scientist's picture

Noticed that too. I can only put it down to the state of perma excitement / self congratulation which Reggie finds himself in...

London Banker's picture

Dear Reggie,

The admiration is mutual!  I've had an interesting adventure in hands on remediation these past two years, but now am back in London and back blogging. I remain a fan of your grasp of detail and fact-based predictions. 

Detlef and Capone/JMa dropped in at the comments to London Banker.  It's not quite as lively as the Roubini threads were back in the day, but it's good to be in touch again all the same.

Very best regards, LB

jkruffin's picture

Moody's doesn't have the balls to downgrade anyone, all they do is threaten to do this or that.  I mean really, when is the last time they actually downgraded anything?  Anyone with a brain knows EUR countries are not AAA, nor is the U.S., nor Japan, nor UK.  When I see them actually do it, then I will believe they have some balls.  Until then, they are just more of the scum.

Milton Waddams's picture

Ratings agencies are a complete farce. All one needs to do is look at the optics of the ratings tier


Investment Grade:

Aaa (tripleplusgood)
Aa1, Aa2, Aa3 (doubleplusgood)
A1, A2, A3 (plusgood)
Baa1, Baa2, Baa3 (good)

Speculative Grade:

Ba1, Ba2, Ba3 (ungood)
B1, B2, B3 (plusungood)
Caa1, Caa2, Caa3 (doubleplusungood)
Ca (tripleplusungood)
C (sellout equity stakeholders to vulture capital by issuing floorless convertible preferred stock)


It somewhat resembles the grading scales commonly used by academia expect for the fact that in Professor Moodys' class there are no "D" or "F" issued.

A Moodys rating of "C" equates to "the lowest rated class of bonds and are typically in default," and "potential recovery values are low".

Ya think the fact that Moodys and others use letter grades but never assign anything below a "C" is done for marketing purposes?

Barb Dwire's picture

Spain is now on double secret probation...

Drag Racer's picture

... all they do is threaten to do this or that.


Exactly. Buffett has too much power...

Id fight Gandhi's picture

Amen bro. There supposed to offer service to help determine risk. But they're sellouts and just play this will they or won't they game until the jig is up by which regular investors are fucked.

Spain is back up St year high 10 yr yield. I have faith they will be fucked or default soon.

Guess the USA via IMF will bailout them. 2what, at least 20%'unemployment nag no growth, good way to piss away wealth.

The euro should be at parity with dxy. But of course it's 1.33, how?really? The euro is fucked more than Greece in may.

hambone's picture

Will the insanity of the bankrupt lending more debt to greater bankrupts who can't handle their current debt be disrupted?  Seems the theme and likely end game is here when the sickest debtor nations are attempting to borrow to just pay the interest on the debt.

It is the death spiral of debt and now that it's starting I'm guessing it will only go faster?  Grab the popcorn and watch the charts gyrate wildly.  Just wish it wasn't all so serious and ominous.  But is what it enjoy the wild ride.

infiniti's picture

Who cares, Spain is so last-decade


Oprah-house, bitchez


Aussie Aussie Aussie!

Caviar Emptor's picture

Europe is getting Moody (s). The bad mood is metastasizing fast. The anti-globalists (read anti-banksters) are growing a pair and taking it to the streets. Berlusconi hangs by a shred. Slovakia FinMin today whispered of the possibility of leaving the Euro Zone. UK numbers are flashing in the aftermath of demonstrations. Belgium is a flashpoint of political indecision affecting the whole zone. Eastern countries are showing signs of strain. 

Meanwhile in the rest of the Bankstersphere things are not much better: Japan sinks further into deflation and Tanken tonight tanks. New Zealand and Australia last night showed major disapointing numbers for retail and housing. 

And every where in the world CPIs are flashing red! And in the midst of it all Best Buy bursts the illusion of the US retail boom, and the Fed sobers the market after a breathless rally. 

Nice setup for a crash

Danielius's picture

I am living in Europe, and try to keep tabs on whats going on... I am looking at things this way.  The Euro countries seem to be under financial attack.  Is this really likely to succeed?  Estonia just adopted the Euro, Lithuania is next in line.  Lithuania has kept the IMF outside its borders, and imposed its own austerity, and the economy is showing distinct signs of life.  (This is where I am living)  I am working here, in construction, lord knows there is nothing happening in the States.  These people are not stupid.  I think they would not be thinking about adopting the Euro if they thought is was at its end.  Perhaps i am wrong.  In any event, the Powers that be behind the Euro are not near as morally bankrupt as their US counterparts.  I think it is a safer currency by far.

erik's picture

If they allow restructuring and defaults to occur in the EU and they all stay together afterward, then once the smoke clears the Euro will be the place to be.  For now though, the bond spreads are rising again, and that means the Euro will have selling pressure until there is a clear resolution.

Caviar Emptor's picture

Yes. But the 'Fiscal Union' may be inflationary. The world needs more debt, right?

London Banker's picture


An excellent observation!  The default setting of Europe in a crisis is to collaborate and meet challenges collectively through shared sacrifice.  The default setting of the USA in a crisis is to attack and unilaterally rape and pillage enemies and allies alike.  The crisis we are witnessing today shows the dynamics in combination.  The USA is deliberately undermining EU institutions and confidence, and the EU is deliberately strengthening its institutions and promoting shared austerity.

Americans can't seem to understand why the Germans and French aren't attacking the Greeks and Spaniards and cutting them loose rather than subsidising their reforms.  The Europeans can't understand why the Americans are propping up over-leveraged failed speculators with greater and greater federal deficits. 

One of these models is superior to the other, and like Danielius, my bet is on the EU.

Caviar Emptor's picture

US is auto destructing rather than attacking or defending.

London Banker's picture

The US attacks by exporting inflation and instability outside its borders.  It is exporting inflation to China and other EM states through a small cabal ramping up global commodity prices, and exporting instability to the EU through orchestrated downgrading of credit ratings and constant media hyperventilation about the eurozone fragmenting.  Watch the patterns and learn the art. 

As your Thomas Jefferson observed, "banks are more dangerous than standing armies."

Escapeclaws's picture

War is politics by other means. The US is at war with the rest of the world. I wonder where that will eventually lead. There is zilch chance for change in the US, needless to say.

hugolp's picture

You are kidding right?

I, as an european, recommend you to come here and check what the EU is all about. The main reason for the european union is a economic and monetary union. Nothing about collaboration and oher mambo jambo. The EU is about centralization of power.

You can check how the EU is trying to be able to block internet access to any citizen because of p2p, or how it pays hugh sumes of money to wealthy land owners, or how it is trying to force a gps in every car so it can control where the car is or goes.

The EU is a monster.

AnAnonymous's picture

The default setting of Europe in a crisis is to collaborate and meet challenges collectively through shared sacrifice.  The default setting of the USA in a crisis is to attack and unilaterally rape and pillage enemies and allies alike.  The crisis we are witnessing today shows the dynamics in combination. 


Acute observation but still  a charade.


The deep changes  happening in Europe, relatively to sovereignty, the necessity of advancing on the political union, are imposed by the US' various actions. True. But not reported as such in Europe. They are reported as everything else but US tied. It is to protect against Islamism, third worlders, China etc...

Turning the whole scheme into a charade. With an unstated motive, comparing dynamics on their respective merits yields nothing but false appreciation of the possible outcome. 

In the end, the wish of Europeans is to get bigger in order to perform similar pillages and rape as the US and even more pressing, avoid being raped and pillaged by countries that got a rough european treatment.

The fear in Britain that China or India want to check by themselves if you can benefit from funding a military through a drugs trade is extremely high.

 Classical Flucht nach vorn .


TBT or not TBT's picture

"....EU is deliberately strengthening its institutions and promoting shared austerity."

Which is to say that the EU is undermining Europe by doubling down on the very mistake that got them where they are...too much government....and ramping up the already high misery level.   The rioting masses will demand...more government, likely more nationalist-socialist than what they have now.   In short the europeans will revert to form.

steve2241's picture

"The Europeans can't understand why the Americans are propping up over-leveraged failed speculators...." --------- And the Europeans haven't propped up Greece and Ireland?

Drag Racer's picture

In any event, the Powers that be behind the Euro are not near as morally bankrupt as their US counterparts.


Same powers man.

edotabin's picture

tru dat!

Create the illusion of a counterweight to the US. This stirs up those feelings of phony unity and whatnot. Make things really bad in europe so as to force/promote solidarity. Once they are all bailed out to the max and owe ooooodles of money and the "powers" feel secure in their position, they will pull the plug on the US.




A Man without Qualities's picture

Similar thing here in Germany.  The ECB is aware that although there are massive problems in Europe, it is actually worse in the US and that most of the attacks are designed to deflect attention from this.  It seems to me that GDP in the US is overstated through various tricks and outright lies by as much as 35%, which would make the fiscal deficit a Greece like 15%.  The foreclosure mess is still going to bring at least BofA down eventually and US politicians have no concept of what to do.


I was at a dinner in Germany this weekend, with politicians and lawyer types and the view seems to be that there is a solvency crisis in the weaker nations and whether this is resolved by inflation or restructuring, the creditors will end up in the same place (poorer) but the stability of the currency should outweigh the needs of the banking system.  The other issue is simply by inflating away the debts of the PIIG nations, what is going to prevent them from building up unsustainable debts (whether public or private) in the future?

hambone's picture


I don't think the Euro is under attack...nor it's member states.  The market is simply putting a price on Euro member debt (Spain, Greece, Ireland, Portugal, etc. vs. German).  Without any means to devalue (print) or grow faster (cheaper currency vs. German exports) these countries have too much debt and all actions are growth negative.  So much so it's hard to see how long they can maintain the payments on existing bonds...just means new debt needs a higher premium to compensate for the risk of default or restructure. 

As Erik and you note, Europe may have a stronger moral compass than US...but will be interesting to see how cohesive US or EU will be in the face of whats coming (big standard of living adjustments).

TBT or not TBT's picture

Who says cohesiveness is the measure of good?    Anyone remember when central planning was the doomsday machine of economics and of liberty itself.   Centralisation is a tried and true Road to Serfdom.   Maybe someone should write a book on it, for good measure.

London Banker's picture

Some of you may remember me from before the paywall as both a commenter and a blogger.

I published my first blog for two years this week.  The subject is the implications of a sovereign default for bank capital.  Basically, any sovereign default by a Zone A nation under the Basle Accords would wipe out all bank capital globally.  This is because banks do not reserve against Zone A sovereign debt, and because the bonds they hold count as Tier 1 capital (assumed to be liquid enough to be a cash-substitute). 

If banks and their supervisors are forced by reality to recognise that sovereign debt entails credit risk, and that some sovereign debt is too illiquid to be worthy of Tier 1 status, then the banking system as we know it today must implode under the strain of both illiquidity and insolvency.  Capital will be wiped out.

Since this is a problem for everyone, there is collective will to avoid a Zone A sovereign default.

Still, it's very bad policy and will need to be reviewed.  The Basle Accords have proved an unmitigated disaster since 1988, being tissue paper over a mountain range of quality and risk differentiation.  They substituted irrational rules for independent credit assessment, judgement and diligence with predictable consequences for the global system's fragility.

<a href="">London Banker: The Truth About Sovereign Defaults and Bank Capital</a>

Caviar Emptor's picture

The domino theory. The debt matrix of Western developed nations and their banks is entirely inter-dependent, pyramided and self-referential. The incestuous nature of the banks allowed them to simply pyramid up securities in lieu of primary banking business. There is an acute vulnerability. 

iota's picture

Just had a quick flick through and your blog warranted bookmarking. Another blog like FOFOA that has interesting content in that strange 'thin' format though.

GoinFawr's picture

gewgle finance home China translated into English. Here are some of the headlines (I'm not kidding)

"Supply-electricity-gas migration or local tight situation "

Yah, ok I get it...

"The friction-wheel of European debt nest crisis concern China sharply to 10 ... "

That seems understandable in light of the current media focus here, but

"Hsi enlarged please watch out bovine 66320 bear 66434 "

caught me totally off-guard.

john milton's picture

portugal should have the last bond sale of this year, wonder how that will go hah hopefully it will trigger next flashcrash

johny2's picture

Anybody knows how I can go long Brazilian Reals against Swiss Franc? 

John McCloy's picture

I have to believe this is all orchestrated at this point. They are alternating back and forth trying to make this quite orderly between both currencies.

iota's picture

Man, you gotta stop posting 1M charts; it's like the FX version of tabloid sensationalism.

TexDenim's picture

This would have been a useful analysis six months ago. Today it is out of date and a joke. There is not a single novel observation in the analysis presented. This is like driving a car using the rear-view mirror as your guide.

sabra1's picture


Yuan-Ruble Trade Starts as Russia, China Shun Dollar



jdoo's picture

Damn Reggie, love your comments but there are 3 typos in that graph...

Josephine29's picture

I have followed this debate for some time and am aware of the scale of Spain's problems with her housing market and banking sector at the top of the list.But there are some odd things in this report from Moodys as notayesmanseconomics reports.

Also the reasons behind it were on this occasion mostly things which had been debated on here for some time. for example to say that Spain has a lot of funding to do in 2011 is an odd thing to raise in mid-December 2010! Where have you been Moodys? Is the obvious response to that. In addition the report raised familiar themes (on here) of the cost of recapitalising Spain’s banks being higher than forecast and fears over Spain’s governments ability to control spending in the various regional and local governments (who comprise well over half of Spanish public expenditure). Traders are likely to have greeted this report with the cry “Mafeking has been relieved”, in case you are wondering the siege of Mafeking was lifted in 1900!

Zina's picture

Al Qaeda strikes on Iran today:





If they can't bomb Iran, they hire Al Qaeda to do it.

buzzsaw99's picture

If the Euro is down then meshugana ben can give more clownbux to his ny cronies.