S&P On Rampage, Downgrades Spain To AA On "Risks To Budgetary Position", Outlook Negative

Tyler Durden's picture


  • In our opinion, Spain is likely to have an extended period of subdued economic growth, which weakens its budgetary position.
  • We are lowering our long-term rating on the Kingdom of Spain to 'AA' from 'AA+'.
  • The negative outlook reflects the possibility of a downgrade if Spain's budgetary position underperforms to a greater extent than we currently anticipate.

Rating Action

On April 28, 2010, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the Kingdom of Spain to 'AA'. At the same time, the 'A-1+' short-term sovereign credit rating was affirmed. The outlook is negative. Standard & Poor's transfer and convertibility assessment is
unchanged at 'AAA'.


The downgrade primarily reflects Standard & Poor's downward revision of its medium-term macroeconomic projections. We now believe that the Spanish economy's shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed.

We now project that real GDP growth will average 0.7% annually in 2010-2016, versus our previous expectations of above 1% annually over this period.

We have also revised our views on the GDP deflator, so that we now expect nominal GDP to regain the 2008 level by 2015; previously, we had assumed that nominal GDP would exceed the 2008 level in 2013. In addition, and while not factored into our base case, we have taken into account the possibility that Spanish public and private sector borrowing costs could remain elevated in 2010-2011 and further slow Spain's recovery from the current recession. Our conclusion is that challenging medium-term economic conditions will further pressure Spain's public finances, and additional measures are likely to be needed to underpin the government's fiscal consolidation strategy and planned program of structural reforms.

We consider the main factors dampening Spain's medium-term growth prospects to be:

  • Private sector indebtedness at 178% of GDP, which in our estimation is higher than that of many of Spain's peers;
  • An inflexible labor market (we expect unemployment to reach 21% in 2010), which we believe is likely to slow the recovery of external price competitiveness;
  • A fairly low export capacity--currently, Spain's exports are close to 25% of GDP--coupled with eroded competitiveness due to past high increases in unit labor costs compared with those of its peers;
  • The financial system's asset quality, which in our opinion is under pressure as reflected in the recent revision of our Banking Industry Country Risk Assessment (BICRA) for Spain to group 3 from group 2. Although the degree of possible additional official support for Spanish banks is uncertain, we currently anticipate a cumulative fiscal cost of at least 5% of GDP. This cost relates to the likely financing needs of the Fondo de Reestructuración Ordenada Bancaria (FROB; €34 billion) and the Fondo de Adquisición de Activos Financieros (€19 billion), which we incorporate into our measure of the general government debt burden; and
  • An unwinding of the government's fiscal stimulus as part of its current strategy to reduce the general government deficit to 3% of GDP by 2013.

We continue to believe that the 2010 fiscal deficit will be broadly in line with the government's target of 9.8% of GDP. However, over the medium term we anticipate weaker revenue performance and higher spending pressures than what the government envisages, mainly due to our view of more subdued economic growth compared with the government's current estimates. As a result, Standard & Poor's projects that the general government deficit is likely to still exceed 5% of GDP by 2013, significantly higher than the government's official target of 3%. Consequently, we estimate that gross government debt is likely to rise above 85% of GDP in 2013 and continue to trend higher until the middle of the decade. Increases in Spain's borrowing costs, beyond what we factor into our base case, could, in our opinion, also reduce the government's ability to meet its fiscal targets this year and next.

Our general government debt projections assume that banks will not draw more than the €27 billion in funds available and not yet used via the government's FROB vehicle between now and 2013. However, under our current weaker baseline growth scenario, we believe there is a possibility that the banking system's capital needs could exceed this figure.


The negative outlook reflects the possibility of a downgrade if Spain's fiscal position underperforms to a greater extent than we currently anticipate. Conversely, we could revise the outlook to stable if the government meets or exceeds its fiscal objectives in 2010 and 2011 and Spain's economic growth prospects prove to be more buoyant than we currently envisage.

Spanish Government Economic Scenarios And Standard & Poor's Updated Baseline Scenario

Average 2010-2013
                                                Spain SGP     S&P Baseline
Real GDP growth (% yoy)                    1.9           0.6
Nominal GDP growth (% yoy)               3.4           1.4
GG deficit (% of GDP)                         6.4           8.1
Gross GG debt (% of GDP, end-2013)  74.1          87.5

SGP--Stability and Growth Program. GG--General government. yoy--Year on year.

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John McCloy's picture

Everybody move along..buy some stocks

sushi's picture

Great headline from the Toronto Globe & Mail:


Fear and panic drives stocks higher

Alienated Serf's picture

These aren't the sovereign bonds you are looking for.

casino capitalism's picture

The big question is when do S&P and/or Moodys overcome their uselessness and downgrade the U.S..  Losing the AAA is a necessary wake-up call for the lousy politicians to do the right thing on wall street reform and the deficit.

ArsoN's picture

...and there's your reason why the rating agencies are not being picked on in the proposed financial reform legislation. 

Bam_Man's picture

The Spanish will just have to export more olives.

Same goes for Greece, Italy and Portugal.

Full disclosure: Going short olive oil futures.

scatterbrains's picture

gold got flow to it

AccreditedEYE's picture

What lovely reversal of the reversal of the major indicies. But that's bullish right Wagner? :)

lizzy36's picture

one wonders when they will downgrade the UK?

bet the algo's will be able to find that on a map.....quickly.

Al Huxley's picture

Based on the pattern demonstrated so far, during, or shortly after the collapse of the UK bond market.

SheepDog-One's picture

Now entire markets are based on judging the quality of debt and bailout payments, and how much return can be made from them?

I just look at insanity such as the moments-ago total reshuffle of everything as Germany says no, DOW does a swan dive from +50 to 0 in seconds, dollar and gold spike as Euro resumes swan neck pattern. This is insane, enjoy reading about it all but wouldnt touch it with a 10 foot pole.

Mae Kadoodie's picture

I pledge to increase my martini consumption to keep pace with increased olive production.

Pure Evil's picture

And, based on your avatar, you're in the room where you can be the most productive after your compliment of martinis and olives. ;o]

Turd Ferguson's picture

Looks like S&P is just checking the CDS charts every morning and adjusting their ratings accordingly. Logical move, at least. Better than their track record of review.

jmf's picture

Moin from Germany,

make sure you see this Cramer clip begging for more trouble in Europe....

Rationale.... Money flowing to the US , keeping rates low, buy buy buy....


The day before the Greece downgrade hit the market....







HarryWanger's picture

I'm not a fan of Cramer but he does have a very valid point here. The money flow out of there can only be beneficial to the US. Simple logic.

jmf's picture


can´t remember him saying this during the $ slump.... ;-)

HarryWanger's picture

Knee jerk reaction in market seems to be complete with a solid base forming at support of 1187. Max pain would be 1175 but 1187 seems to be holding well here. Market's resilience to negative news is encouraging.

Jim in MN's picture

Hey can we get one of those screen shots of the PPT, er JPM gunning the index?  Dow really really wants to be red, but it is 'not in the cards' as they say.  Interesting action at the minute.

Fyodor Does DF Ski's picture

But it is in the house of cards, as they say (whoever they are...)

scatterbrains's picture

sometimes I wonder if times like these are full on print mode moments just to check the SPY but reveales itself in gold and oil.. just waiting for oil to rocket higher now

primefool's picture

Now all thats left to kick the remaining leg of the stool out is for benny to remove the word "extended". Bye bye Euro. maybe the Chinese will reconsider their decision to diversify away from the Dollar. Should generate enough demand for Treasuries to keep the world spinning for a few more weeks.

HarryWanger's picture

Extended language will not be removed. That's already been established in other testimonies. That's what I thing will juice the market higher today. As long as Europe is broken, the US benefits. Pretty simple really.

Pure Evil's picture

Oh come on Turd, don't Ferguson all over his head.

Simon Jester's picture

Yes, you are pretty simple. Really.

As long as the whole western world collapses, the US benefits. Really?

gjp's picture

Amazing, the alacrity they are capable of when it comes to downgrading the rest of the world ... brings to mind something about casting stones and glass houses.  The insanity and insolvency is global, but America is at its core.  I'd take Europe as a whole with its exporting powerhouse in Germany over America today.  If they sort through the EMU issues (not easy I admit, but at least they're dealing with their issues unlike the other side of the pond), long Europe short US will be a nice pair trade.  Likely better to just short it all though.

Zombie Investor's picture

I haven't been following closely and was wondering if S&P is catching up with Moodys/Fitch on downgrading Greece/Portugal/Spain, or are they leading the pack?

Cyan Lite's picture

I'm buying the dip...

HarryWanger's picture

Good job. We'll pop on the Fed decision. 1187 is pretty rock solid support right here.

Dr. No's picture

I dont think so.  This market has been starting a sell the news approach.  2:15 will tell.

brooklynlou's picture

Stupid question. Why 2:15?

Cyan Lite's picture

That's when the Fed releases the statement...  Eastern Standard Time...

Dr. No's picture

Tip of the hat.  This sucker is going up.

pcrotty41@hotmail.com's picture

Has the pupil turned on its master? 

primefool's picture

Why exactly do folks tink the US and its currency are central in the world? Because we are better looking? LOL.

To all aspiring global superpowers. first you need:

1. a 600 Trillion cloud of "derivatives" encircling the globe. This cloud can be activated very precisely to take out any economy at will - like cruise missiles - only better.

2. Need super smart bankers.

3. need various shock-troops - like ratings agencies to soften up targets as needed.

4. Unlimited liquidity. Extremely large liquid bond markets. Entertainment provoded by stock market ( think playboy bunnies during a war)

Once you have all the above check back for further instructions.

Edna R. Rider's picture

It is rather amusing to watch the market react so badly and so quickly.  Yes, Harry Wangers will hold, but it must feel like you're part of a terrorist jihad group going into your last (or first) suicide mission.  Will you die today?  tomorrow?  Maybe not for a long while (it may be weeks, Harry).  But I bet someday you will.  Put a little hedge fund leverage on that and I bet you find managers who never, ever sleep.  Not a wink.

B9K9's picture

Who's this Harry Wanger fellow? I thought his new ZH handle was 'Hairy Wanker'.

Citizen of an IKEA World's picture

A distinction without a difference.

zeroman's picture

i find this whole downgrade thing a musing notification.  Lets see US Govt rating agencies are down grading Euro countries. Nahh, there is no way they are not a little LATE!!!!  Let's see who stands to benefit from capital flows and debt financing if the euro union falls?  hmmmmmmm The Bernanke Banksers and Geithner Goone's!!! Every wonder why the u.s. goes around being the military arm of the world? Iraq, Afhganistan, etc.? Well, you you are the world reserve currency using a bank that acts like the government controls it but doesn't and can hide all its financial dealings, you must show that you have power.  The U.S. military is the one thing the countries of the world do not want to mess with.  Anyway, this is Geithner's master plan. Help the destruction of the Euro and its union and flight to safety will only make the U.S. look great.  No one is going to put their money in communist china, lets be real.

walküre's picture

S&P rated mortgage based "assets" AAA to be sold to global investors, mainly European banks.

Enough said about S&P's manipulation.

whatsinaname's picture

is the Dow 36K yet ?

whatsinaname's picture

Are all of these "sudden downgrades" a gimmick to float the market downwards ? Today's action may tell us a lot. Bond market action today does not seem to suggest any of that.