Spain Loses Final A Rating With Moodys Downgrade To Baa3, May Downgrade Further - Full Text

Tyler Durden's picture

And so the final Spanish A rating tumbles. Why is this kinda, sorta a big deal? Because as we explained in the end of April, "If all agencies downgrade Spain to BBB+ or below, the ECB could increase haircuts by 5% on SPGBs. The key aspect in terms of the Spanish downgrade(s) is the ECB's LTRO. If all three rating agencies move Spain to BBB+ or below then under the ECB's current framework it moves into the Step 3 collateral bucket which requires an additional 5% haircut across the maturities. In classifying its risk management buckets, the ECB uses the highest of the ratings to determine an asset's position (unlike the sovereign benchmark indices which use the lowest rating, in general). Fitch and Moodys currently rate Spain at A and A3 respectively, with both having a negative outlook in place leaving only a small downgrade margin before Spain migrates to the lower ECB bucket."

And now the collateral squeeze is on, unless of course the ECB changes the reules one more time.

Full Moody's statement.

Moody's downgrades Spain's government bond rating to Baa3 from A3, on review for further downgrade
London, 13 June 2012 -- Moody's Investors Service has today downgraded Spain's government bond rating to Baa3 from A3, and has also placed it on review for possible further downgrade. Moody's expects to conclude the review within a maximum timeframe of three months.
The decision to downgrade the Kingdom of Spain's rating reflects the following key factors:
1. The Spanish government intends to borrow up to EUR100 billion from the European Financial Stability Facility (EFSF) or from its successor, the European Stability Mechanism (ESM), to recapitalise its banking system.
This will further increase the country's debt burden, which has risen dramatically since the onset of the financial crisis.
2. The Spanish government has very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalisation funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from the ECB.
3. The Spanish economy's continued weakness makes the government's weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years.
Moody's has today also downgraded the rating of Spain's Fondo de Reestructuración Ordenada Bancaria (FROB) to Baa3 from A3 and placed the rating on review for possible further downgrade, in line with the sovereign rating action. The FROB's debt is fully and unconditionally guaranteed by the government of Spain. Moreover, the provisional short-term rating of the Spanish government has today also been downgraded to (P)Prime-3 from (P)Prime-2. Similarly, FROB's short-term rating was lowered to P-3 from P-2.
The review for downgrade will focus on the outcome of the ongoing external audits of the Spanish banking system, the conditionality and details of the EFSF/ESM loan agreement, and the specific execution strategy developed for the banking system's recapitalisation. Moody's will also consider any further initiatives at the euro area level. In addition, Spain's rating -- as well as the ratings of other euro area countries -- could be adversely affected if the risk of a Greek exit from the euro area were to rise further.
The first key driver underlying Moody's three-notch downgrade of Spain's government bond rating is the government's decision to seek up to EUR100 billion of external funding from the EFSF or ESM. A formal request will be presented shortly, but the euro area finance ministers announced on 10 June their willingness to accede to that request. The sum of EUR100 billion is twice the size of Moody's previous base case estimate, and in line with the rating agency's adverse case estimate.
While the details of the support package have yet to be announced, it is clear that the responsibility for supporting Spanish banks rests with the Spanish government. EFSF funds will be lent to the government which will use them to recapitalise Spanish banks. This borrowing will materially worsen the government's debt position: Moody's now expects Spain's public debt ratio to rise to around 90% of GDP this year and to continue rising until the middle of the decade. Stabilising the ratio will be a key challenge for the Spanish authorities, requiring years of continued fiscal consolidation. As a consequence, the government's fiscal and debt position is no longer commensurate with a rating in the A range or even at the top of the Baa range.
The second driver of today's rating action is the Spanish government's very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalisation funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn require funding from the ECB to purchase these bonds. In Moody's view, this is an unsustainable situation. In the absence of positive developments that shore up investor sentiment, such as a resumption of growth or rapid progress in achieving fiscal consolidation objectives, neither of which is likely in the current environment, the government is likely to become increasingly constrained with regard to the terms under which it is able to refinance maturing debt. If unchecked, Moody's believes that the risk of the government losing access to private debt markets on affordable terms and needing to seek direct support from the EFSF/ESM will continue to rise.
Given the experience with private-sector involvement (PSI) in Greece and the intentions expressed by euro area officials around the development of the ESM, Moody's believes that the debts of euro area sovereigns that are fully dependent upon official sources to fund their borrowing requirements represent speculative-grade risk. Support would, if needed for a sustained period, be likely to be made conditional on loss-sharing with private investors or in extremis withdrawn altogether.
Moody's action to place the government's rating one notch above speculative grade reflects the rating agency's view that Spain has moved much closer to needing to seek direct support from the EFSF/ESM, and therefore much closer to being positioned within speculative grade.
Moody's decision to leave the government's rating in investment grade reflects the underlying strength of the Spanish economy and the government's clear desire to reverse the debt trajectory through a strong fiscal consolidation programme. Moody's also acknowledges several factors that differentiate the current programme from the support packages extended to Ireland, Portugal and Greece. In particular, the size of the support package is significantly smaller than it is in the other cases. The maximum amount of EUR100 billion equates to around 10% of Spain's GDP, compared with more than 54% of GDP in the case of Ireland, 114% of GDP in Greece and 46% of GDP in Portugal. Moody's therefore also considers the issue of subordination of bondholders to the senior creditor EFSF/ESM to be less of a negative factor. Senior creditors account for 37% and 40% of total public debt in Ireland and Portugal, while the respective share in Spain is 11% (in case the maximum amount was drawn).
Moody's has today also placed Spain's Baa3 government bond rating on review for possible further downgrade in order to assess the implications of several factors on the Spanish government's ability to continue to fund its borrowing requirements in the private debt markets. These factors are as follows:
- The clarification of the remaining open questions regarding the size and terms of the banking support package.
- The ultimate size of the government's liability following the results of the independent valuations and audits of all the Spanish banks, which are expected on 31 July.
- Any further initiative at the euro-area level, in particular those relating to steps towards a fiscal and banking union.
- The impact of the banking support package on Spain's ability to restore market confidence in the banking sector and by extension in the government bond market.

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world_debt_slave's picture

baaa, baaa, bitchez!


Hey, that's my line.....I guess you have to really fuck up and I mean REALLY fuck up to lose an A rating these days.  Thanks Moody's. I will plan my investment future around your very helpful evaluation. 

EscapeKey's picture

Nah, you just have to increase the size of your bribes. My bet is that Moody's asked for more than Spain were willing to cough up.

Not that it matter anyway, sovereign risk means nothing to the equities markets, which will no doubt surge on the news. Thanks to the PPT.

Chris Jusset's picture

Has the Spanish domino fallen yet?

surf0766's picture

They asked for a bailout. They failed.

slewie the pi-rat's picture

no, they got it!  that's why they got downgraded!

this is all on a curve anyhow

zeroHedge's rating is F1CnBZ = Fuked, Comrade BiCheZ!

Element's picture

wtf is Moody's? ... no, actually, ... don't answer that.

BlueCollaredOne's picture

Or Moody's realizes that the more people are paying attention to Spain and the Euro, the less they are paying attention to the US. 

Classic look at my left hand, but dont look at my right hand that street magicians pull. 

trebuchet's picture

not this time. you cant plunge protect with empty buckets.


1bn per DAY outflow from Greece. All banks there already on ELA via the NBG and estimates say tehy have 30bn left... that is 15 days tops if the current rate of withdrawals accelerates like it has been over the last few days

Spain outflow gathering pace, along with Italy. 

UK announced "we have liquidity plans in place"  - that means its not just me pulling my money out of UK banks...

We dont know the French position but it is probably the same, as with Netherlands (maybe Merkels orange top was a signal to tell them to stop) 


This downgraqde will trigger margin calls where anyone parking money in London will have to cover the calls. 

THE BANKING CRISIS IN SPAIN IS A SPANISH SOLVENCY CRISIS - the  Govt would have fixed it if they COULD have !! 


So two Euroland countries look like they are tapped out on both private and public sector savings (net debt lines) leaving Italy which will get crucified likely before Friday... 

Unless TSipras throws in the towel pre-election saying he will stick to the bailout... would you as an Italian investor leave you money in Italian equity or deposits on Friday knowing that when you wake up on Monday it could be on the path of no return? 





disabledvet's picture

I'm not sure Spain has much in the form of "hard assets" to flee. Not true when it comes to Italy! If Italian sovereigns implode (tomorrow?!) should be some "wild times" in the EU. Commence "Mother of all Capital Raisings."

trebuchet's picture

I bet ECB council right now thinking " we should have voted in last council to upgrade our SMP to POMO buying....   in case..........too late for that for tomorrow,  the europeans like to be sticklers for due process.. coz tomorrow could get ugly with the italian bond auction, lets pray the italian banks have enough change left over from their LTRO slush fund to cover their collateral providers in the first place

Too late to check whether they issued new "govt guaranteed" bonds themselves recently to raise cash to recycle back into sov debt hitting the market tomorrow - i wonder if anyone has info on that reading this ... would be interesting 


HoofHearted's picture

Is it time to cue the deer? Or will that be when Germany loses its A rating for guaranteeing all the debt for its shiftless neighbors?

valley chick's picture

not quite yet.....cue... Italy... :)

cougar_w's picture

It's on now, bitchez.

Hedgetard55's picture

Like Donkey Kong, bitchez.

I Got Worms's picture

Damn I hope Donkey Kong makes an appearance before the weekend.

junkyardjack's picture

European banks already downgraded rating agencies to irrelevant...

GtownSLV's picture

Little more than a flesh wound on a rotting corpse.

junkyardjack's picture

Moody's just pissed in a pool full of shit...

Vincent Vega's picture

"And now the collateral squeeze is on unless of course the ECB decides to change the rules one more time."  Count on it.

NotApplicable's picture

I'm going to assume it's already rewritten and waiting to to be published.

On a weekend.

RoadKill's picture

Lets start the betting on a failed auction for Italy tomorrow.

stocktivity's picture

ECB steps in and buys...playing kick the can again. This auction can't be allowed to fail with the Greek election coming Sunday. Monday could be a bloodbath.

trebuchet's picture

ECB can't - only in the secondary market.

RoadKill's picture

Lets start the betting on a failed auction for Italy tomorrow.

Global Hunter's picture

"If all agencies downgrade Spain to BBB+ or below, the ECB could increase haircuts by 5% on SPGBs."

What's stopping the ECB from changing the rules?  Its not like these banksters and politicians have let rules get in their way in the recent past

CommunityStandard's picture

Send my regards to Baarcelona!

Mark123's picture

Evil banker plan:


1. Extend easy credit to people/companies/govt.  Skim profits as economy goes wild.


2. Raise interest rates/call loans/restrict credit.


3. Confiscate real assets and become super powerful.


4. repeat.

disabledvet's picture

JP Morgan was up big today...

stocktivity's picture

Pussy congressmen let Jamie intimidate them today.

carbonmutant's picture

"The Spanish economy's continued weakness makes the government's weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern..."


cougar_w's picture

But Spain will always have the ECB at their backs, right? Or was that the ESM. No it was the WTF. I mean wait it was the LOL.

I forget. Something. Gots their back.

RobotTrader's picture

Why is it that these rating agencies always downgrade this type of debt near or at the lows?

When 95% of the downside move is already over with?

carbonmutant's picture

Because they don't want to be seen as the cause of the decline in value...

stocktivity's picture

wait...shouldn't ratings agencies rate?

Vincent Vega's picture

It's a lot like people who post after the fact comments on financial blogs with regard to what stocks, bonds, commodities, or markets, have done. You should understand this perfectly, Robo.

Poetic injustice's picture

So hard to guess who put -1 to your comment (wasn't me) :)

larry david's picture

Why is it that you always tell everyone to buy stocks "pinned at their all time world record highs?"

When 99+% of the upside move is already over with?

RobotTrader's picture

I never recommend buying stocks at "world record highs"


I only point them out, to demonstrate how strong the market is, especially retail, when so many are predicting "Imminent Collapse".

And to also demonstrate the relative strength of consumer discretionary in the face of horrid weakness in all the "resource" and "hard asset" plays so many have been touting.

If you want a recommendation, I'm recommending JNJ right now, world record volume today coming out of a year long consolidation.

Conman's picture

You mean strong market in retail in stores like LULU. I believe you jizzed your pants over their earnings prowess.

trebuchet's picture

ha ha you must be so short in your positions for that one

trebuchet's picture

ha ha you must be so short in your positions for that one

hedgeless_horseman's picture



In theory, these downgrades would not help Mario Draghi's EuroSystem Sponge Bob's Super Absorbancy SMP portfolio performance, but he is a hold to maturity type of guy.

With a view to leaving liquidity conditions unaffected by the programme, the Eurosystem re-absorbs the liquidity provided through the SMP by means of weekly liquidity-absorbing operations.

Because he must have Spanish sovereigns* in there, too, right? 

It seems to me that it would be hard to sterilize so much shit, but what do I know?

I am just glad it isn't my job to keep Europe afloat.  Those of you on the continent better check your dive gear.  Glub glub.


*Under the SMP, public and private debt securities are considered eligible for purchase.