Egan Jones Cuts Spain To BB- From BB+

Love them or hate them, Egan Jones is always about 1 month ahead of the other rating agencies.

Spain has been weakened by the government deficit of 8.9%, the 24+% unemployment, the IIF's recent estimate of additional bank loan losses up to EUR260B, and possible depositor withdrawals. Over the past three fiscal years (i.e., from 2008 to 2010), Spain's GDP declined from EUR1.09 trillion to EUR1.07 trillion. Meanwhile, its debt mushroomed from EUR381B to EUR563B. The recently-reported quarters are of little comfort since the debt has risen to EUR 641B while GDP has been more or less flat resulting in a 67% debt to GDP as of 2010 (near 88% currently) and are rising. Social benefits are a major problem; while payments to the govt have been more or less flat over the past four years (up EUR 8 billion),  payments from the government have been up EUR 44B). As a result, Spain is short about EUR50B per year for social payments, EUR20B per year for interest, and an additional EUR 30B for asset growth; hence the EUR100B per annum increase in debt. Unemployment is at depression levels of 24% while adjusted wage rates have declined.


Spain will inevitably be faced with sizable payments to support its banking sector and for its weaker provinces. Assets of Spain's largest two banks exceed its GDP. We are slipping our rating to "BB"; watch for requests for support from the banks.

As a reminder, once all the other rating agencies (and S&P already cut Spain to BBB+ a month ago, just 9 days after Egan-Jones again cut Spain from BBB to BBB-) cut Spain to BBB+ and lower, the country will see its haircut on ECB pledged bonds increase by another 5%, leading to collateral calls. More here.

Carry on.