S&P Cuts Spain to BBB+, Outlook Negative

Tyler Durden's picture

Adding insult to Bayern Munich injury, we just got S&P which did the impossible and cut Spain to BBB+ from A (outlook negative) not on Friday after hours. Kneejerk reaction is a 30 pip drop in EURUSD. Oh, and most amusing, those witches among men, Egan Jones, downgraded Spain from BBB to BBB-.... a week ago. Crush them, destroy them... How dare they be ahead of the pack as usual: after all their NRSRO application was missing a god damn comma.

Full release:

  • We believe that the Kingdom of Spain's budget trajectory will likely deteriorate against a background of economic contraction in contrast withour previous projections.
  • At the same time, we see an increasing likelihood that Spain's government will need to provide further fiscal support to the banking sector.
  • As a consequence, we believe there are heightened risks that Spain's net general government debt could rise further.
  • We are therefore lowering our long- and short-term sovereign credit ratings on Spain to 'BBB+/A-2' from 'A/A-1'.
  • The negative outlook on the long-term rating reflects our view of the significant risks to Spain's economic growth and budgetary performance, and the impact we believe this will likely have on the sovereign's creditworthiness.

NEW YORK (Standard & Poor's) April 26, 2012--Standard & Poor's Ratings Services today said it lowered its long-term sovereign credit rating on the Kingdom of Spain to 'BBB+' from 'A'. At the same time, we lowered the short-term sovereign credit rating to 'A-2' from 'A-1'. The outlook on the long-term rating is negative.

Our transfer and convertibility (T&C) assessment for Spain, as for all European Economic and Monetary Union (EMU or eurozone) members, is 'AAA', reflecting Standard & Poor's view that the likelihood of the European Central Bank (ECB) restricting non-sovereign access to foreign currency needed for debt service of non-euro obligations is low. This reflects the full and open access to foreign currency that holders of euro currently enjoy and which we expect to remain the case in the foreseeable future.

The downgrade reflects our view of mounting risks to Spain's net general government debt as a share of GDP in light of the contracting economy, in particular due to:

The deterioration in the budget deficit trajectory for 2011-2015, in contrast with our previous projections, and

The increasing likelihood that the government will need to provide further fiscal support to the banking sector.

Consequently, we think risks are rising to fiscal performance and flexibility, and to the sovereign debt burden, particularly in light of the increased contingent liabilities that could materialize on the government's balance sheet.

These concerns have led us to conclude a two notch downgrade is warranted in accordance with our methodology (see "Sovereign Government Rating Methodology And Assumptions," June 30, 2011).

Under our revised base-case macroeconomic scenario, which we view as consistent with the downgrade and the negative outlook, we have lowered our forecast for GDP to contract in real terms by 1.5% in 2012 and 0.5% for 2013. We had previously forecast real GDP growth of 0.3% in 2012 and 1% in 2013.

We believe that negative drags on GDP include:

Declining disposable incomes;
Private-sector deleveraging;
Implementation of the government's front-loaded fiscal consolidation plan; and
The uncertain outlook for external demand in many of Spain's key trading partners.

In our opinion, the Spanish economy is rebalancing, and the measures the government has taken should facilitate this process. Spain's current account deficit (CAD) is on a narrowing trajectory, significantly supported by the Spanish economy's strong export performance, especially since 2009. The CAD was 3.5% of GDP at year-end 2011, compared with 10.0% in 2007. Excluding the income deficit, the current account is in balance. The income deficit, which reflects net interest and dividend payments on Spain's net liabilities to the
rest of the world, widened in 2011 on the back of increased external funding costs. We expect the current account to broadly balance in 2013-2014, before posting a higher surplus thereafter. In contrast to 2008-2010, the Bank of Spain--through Target2 overdrafts with the ECB (exceeding €250 billion in March 2012, from around €150 billion at the end of 2011)--has now become the major source of financing Spain's CAD. In our opinion, this reflects the extent to which Spain's commercial banking system has sharply increased its
dependency on official funding sources to a considerably higher level than we anticipated in January, when we last revised our rating on Spain (see "Spain's Ratings Lowered To 'A/A-1'; Outlook Negative," Jan. 13, 2012).

Despite the unfavorable economic conditions, we believe that the new government has been front-loading and implementing a comprehensive set of structural reforms, which should support economic growth over the longer term.

In particular, authorities have implemented a comprehensive reform of the Spanish labor market, which we believe could significantly reduce many of the existing structural rigidities and improve the flexibility in wage setting.  Even if, in our opinion, the reform is unlikely to eliminate the structural duality in the Spanish labor market, we believe it will ultimately benefit employment growth once a sustainable recovery sets in. In the near term, increased labor market flexibility is likely to accelerate the necessary wage adjustment and reduce the pace of job-shedding. At the same time, we do not believe the labor reform measures will create net employment in the near term.
As a consequence, the already high unemployment rate--especially among the young--will likely worsen until a sustainable recovery sets in.

Financial sector reform, announced in February 2012, requires banks to allocate additional loan loss provisions and raise capital buffers on exposure to real estate developments and construction projects. We believe these sectors will continue to be the main sources of asset quality deterioration. The reform has also led to further banking sector consolidation. Recent acquirers have benefited from asset protection schemes, with potential losses covered by a partial (80%) guarantee provided by the Deposit Insurance Fund to absorb future credit losses from the acquired banks' legacy portfolios. We estimate that the guarantees related to these schemes, combined with those
that will likely be provided in the upcoming sale of three entities currently controlled by the Fondo de Reestructuracion Ordenada Bancaria (FROB),represent a contingent liability for the sovereign in the amount of about 3.75% of GDP. Combined with embedded risks in the rest of the banking sector, public enterprises, and other state guarantees, we now estimate contingent fiscal risks to the sovereign as moderate, as defined in our criteria (see "Sovereign Government Rating Methodology And Assumptions," published June 30, 2011).

We believe the ECB's recent long-term repurchase operations (LTROs) have significantly reduced the risks the Spanish banking sector faced in refinancing its medium-term external debt and its short-term interbank liabilities maturing in the first half of 2012. The LTRO also helped banks to finance their government debt portfolios cheaply. Nevertheless, we do not view the provision of liquidity support by the monetary authorities as a substitute for financial sector restructuring and economic rebalancing.

In our view, the strategy to manage the European sovereign debt crisis continues to lack effectiveness. We think credit conditions, and hence the economic outlook for Spain, could now deteriorate further than we anticipated earlier this year unless offsetting eurozone policy measures are implemented to support investor confidence and stabilize capital flows with the rest of the world. Such measures at the eurozone level could include a greater pooling of fiscal resources and obligations, possibly direct bank support mechanisms
to weaken the sovereign-bank links, and a consolidation of banking supervision or a greater harmonization of labor and wage policies.

In light of the rapid rise in public debt since 2008, we expect the Spanish government to implement a sustained budgetary consolidation effort--includingstrengthening fiscal surveillance frameworks at the regional government level--aimed at gradually reducing the government's net financing needs.

Balancing this commitment to stabilizing public finances with policymakers' clear interest in preventing an acceleration of the economic downturn will be challenging in the absence of fiscal transfers from abroad, or private-sector credit creation at home. At the same time, we believe front-loaded fiscal austerity in Spain will likely exacerbate the numerous risks to growth over the medium term, highlighting the importance of offsetting stimulus through labor market and structural reforms.

Following budgetary slippage of 2.5% of GDP in 2011 beyond the 6.0% target, the government has committed to a target of 5.3% of GDP in 2012 and 3.0% in 2013. In our opinion, these targets are currently unlikely to be met given the economic and financial environment. We forecast a budget deficit of 6.2% of GDP in 2012 and 4.8% in 2013 (our previous forecasts were 5.1% and 4.4%). We also believe the delay to adopting the 2012 budget could reduce the government's capacity to prevent deviations from its budget plans.

Given the significant and regular budgetary slippages at the regional level-–the main contributor to the deviations from the government's
targets--the national government's willingness to fully enforce its new budget will likely be tested as we expect the regions to post a shortfall of around 0.4% of GDP in 2012, above their 1.5% of GDP 2012 target. Because of  higher-than-previously-expected deficit projections, and other debt-increasing items such as arrears resolutions (estimated at 3.9% of GDP in 2012), we forecast net general government debt at 76.6% of GDP in 2014, against our previous projection of 64.6% of GDP. State guarantees to the European Financial Stability Fund, the European Stability Mechanism, and the Electricity Deficit Amortization Fund, which are included in the government's own debt projections, are not part of our debt estimate and are instead classified with other state guarantees.

In line with the increasing risks we see to Spain's recovery, we have also considered a downside scenario that, if it were to eventuate, could lead us to lower the ratings again. This downside scenario assumes a deeper recession in Spain this year, as a result of weaker external and domestic demand, with real GDP declining by 4% in real terms, followed by a contraction of 1% in 2013 and a weak recovery thereafter. Under this downside scenario, the current account would adjust faster, but the general government deficit trajectory would
deteriorate further. The net general government debt ratio would breach 80% of GDP. For details for all our scenarios, see our analysis on Spain.

The negative outlook reflects our view of the significant external and domestic risks to Spain's economic growth and budgetary performance, and the impact we believe this may have on the sovereign's creditworthiness.

We could lower the ratings if we were to see a rise in net general government debt to above 80% of GDP during 2012-2014, reflecting fiscal deviations, weakening growth, or the crystallization of contingent liabilities on the government's balance sheet beyond our current projections. We could also consider a downgrade if political support for the current reform agenda were to wane. Moreover, we could lower the ratings if we see that Spain's external position worsens or its competitiveness does not continue to approach that of
its trading partners, a key factor for Spain to return to sustainable economic and employment growth.

We could revise the outlook to stable if we see that risks to external financing conditions subside and Spain's economic growth prospects improve, enabling the net government debt ratio to stabilize below 80% of GDP.


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Death and Gravity's picture

"Spain Cuts Spain to BBB+, Outlook Negative"


Hard1's picture

Olé! Bitchez.  CDS already indicates true rating is around CC. Rating agencies irrelevant nowadays. Probably bullish news actually.

trebuchet's picture

of course its bullish, more REAL money pumping into spain in gross fixed cap formation last time i checked, euro down good for exports - more cabbages and lettuce coming out of spain than ever before, pressure on banks to knock heads and get their asets sorted and get the euro crap fixed, while rajoy brings the regions into line

monetary policy via the the exchange rate transmission channel is the only one thats been working for last 3 years.... coz its the only one they dont control, despite best CB coordinated efforts


gjp's picture

Bullish for America anyway, and does anything else matter?

Just more American rating agencies imposing discipline on the est of the world while at home america runs up the biggest bad debt in the world to support endless consumption and insane speculation in narcissistic unproductive crap like social networking and tech toys.

What a sick joke.

SheepDog-One's picture

Watch out for Spaniards with sharp objects, they'll CUT ya, bitch!

Rubbish's picture

Soon we will have 7 billion people standing around looking at each other questioning, "are you paying?" "I'm not paying" "are you paying?" "not me" "are you paying?" "Nope"

wandstrasse's picture

What does a country have to do or not do to disappear completely from the rating radar?

magpie's picture

Have a government with a zero deficit/debt rule and  a barter economy ?

Theta_Burn's picture

Whatever the fuck they want....

Threaten charges, smear agencies name in the lamestream media as irresponsible/inacurate.

How dare anybody question government sanctioned reports

Your question was touched on a bit a few days ago  http://www.zerohedge.com/news/porn-addicts-formerly-known-sec-take-their-vendetta-egan-jones-next-level

Buck Johnson's picture

Egan Jones won't play ball and the govt. was made.  No it seems the S & P 500 won't either.  Spain is done and this happened on a thurday not a friday.  Is this a test to see what the market will do or is it they just don't care anymore and just put it out there.

Reggie Middleton's picture

As was clearly stated last Monday...

The Spain Pain Will Not Wane: Continuing the Contagion Saga:

In the general our analysis Spain public finances projections_033010, the first four (of 12) pages basically outline the gist of the Spanish problem today, to wit here are the first two:



Darkness's picture

You are the best. Thank you for all your hard work. Making sure I short the world, one country at a time. $GLD

fonzannoon's picture

Where did you draft Spain today Reggie. Come on I thought you were above that crap.

FlyoverCountrySchmuck's picture

Well, Spain could OBVIOUSLY solve this problem by taxing the regular economy in to extinction, and replacing it with a sustainable, GREEN ECONOMY!!! (right???)



Everybodys All American's picture

Reggie ... you sold out to the darkside.

CrashisOptimistic's picture

More pimping on someone else's traffic = :(

I'll award you 2 points for longevity, but that doesn't excuse pimping.  Stop it.

The trend is your friend's picture

Damn Reggie, has anyone shown you how to use the same damn font

Ben Burnyankme's picture

Warms my heart.  Glad S&P is on top of this.  What was Lehman's rating on Sept 15th, 2008?

trampstamp's picture

means nothing nowadays. Good for S&P downgrading though.

Sockeye's picture

Uh oh.

Someone's got some spainin' to do!

Marge N. Callz's picture

More QE! More LTRO! Now if we can just get a horrible GDP figure tomorrow, we can really put the P in Ponzi!

SheepDog-One's picture

Right, DOW futures should be up about +250 by open tomorrow on this.

AlaricBalth's picture

Hasta la vista, baby!

Josephine29's picture

The Spanish economy continues to weaken and I guess S&P has finally cottoned onto this fact. As the excerpt from the artilce shown below indicates Spain's economy has serious problems.

Services turnover index

The interannual rate of turnover for the Market services sector stands at -1.9% in February, eight tenths lower than that registered in January

However if we take the trouble to look further down the report

After eliminating the calendar effect, that is, the difference between the number of working days in a given month in different years, the interannual variation of the General Index of
Services sector turnover stood at –4.4 in February, more than two points below that registered the previous month.

So the report from thr largest part of the economy is yet again grim if we allow for the extra day. And frankly even if we ignored the extra day’s effect output was lower than a year ago. If we look at the underlying index it is at 85.1 compared to a base of 2005=100.




The Swedish Chef's picture

You did forget the Chelsea insult. Or is Barcelona no longer part of the Kingdom of Spain?

cougar_w's picture

Barcelona is part of the Kingdom of Squid. Or shall be very shortly.

LongSoupLine's picture

No, it's just that Real Madrid is the one full of the overpaid pretty boy whiners and pussies.  So glad BM schooled them!

Bay of Pigs's picture

Nobody could have seen this coming. Impossible.

wandstrasse's picture

thank you. your comment soothes my being shocked, shocked, shocked.

Fish Gone Bad's picture

Two things will continue, until they don't.  They will continue to make up whatever stories they want and pull another rabbit out of the hat.  Things will continue to get even more fucked up until all the money that important people had at risk is safe.  Then and only then, it will be "Game On!".  Until that day, and it could be tomorow or a year from now, everything will be fine... until it isn't.  That said, this crisis will be unike any other in history.  Everyone, and I mean Everyone, will have seen this one coming (for years), and will still get wiped out.

ekm's picture

Oh, oh, oh, I feel so bad.

Aunty Christ's picture

based on where Spain's cds trade, it should be B+ ( neg outlook)

Conman's picture

Say this mantra along with me - All news is good news, BTFD!

Then puke, and buy more ammo.

magpie's picture

ESM bailout  mechanism, new target acquired.

cougar_w's picture

Have locked on swap-line torpedos Captain. Ready to fire ...

Everybodys All American's picture

You mean they didn't wait for a three day week end. Huh. Look if you don't think S&P will not downgrade the US again you are in for quite a wake up.

How's that QE working in Europe? It's not and it's not working here either. Bernanke needs to be removed asap before he does any more long term damage.

scatterbrains's picture

WTF ?  Where's the SEC damn it? This can't be!

cougar_w's picture

The SEC are still waterboarding Sean Egan. They can only save democracy one terrorist at a time, you know.

carbonmutant's picture

Couger 'you been filing your claws again...?

LongSoupLine's picture



waterboarding's out...the new (and deeply more inhumaine) torture is a forced listening to Maria Bartiromo's voice.

EscapeKey's picture

I can barely keep up with all this bullish news. That should be good for 2-300 points on the DJIA at the very least!

resurger's picture

Weekend Party, Monday Party, Sunday Party, next week Party, A+ Party, BBB+ Party, CCC Party ...

PArty PArty PArty..............

navy62802's picture

24 hours until the world explodes. They can't do this on a Thursday afternoon!!!

DeadFred's picture

That is the most curious part, why today??? I doubt that it was random but surely it could have waited until tomorrow. 

H. Perowne's picture

Inside of Zimbabwe Bennie's head: "Theworsethebettertheworsethebettertheworsethebettertheworsethebetter . . ."

resurger's picture

i dont know who quoted this "bad news is good news, good news is the best news"