FXstreet.com (Barcelona) - In what should be percevied as quite
a shocker, Moody's announced after the NY close it confirms Spain's
government bond rating at Baa3, while assigning a negative outlook.
Moody's issued the following statement in downgrading
Spain's sovereign credit rating outlook to negative:
Moody's Investors Service has today confirmed the Kingdom of
Spain's Baa3 government bond rating and assigned a negative outlook
to the rating. In addition, Moody's has confirmed Spain's
short-term rating at (
P
)Prime-3. Today's rating action concludes the review for possible
further downgrade of Spain's rating that Moody's had initiated on
13 June 2012.
The decision to confirm the Kingdom of Spain's sovereign ratings
reflects the following positive developments since June:
1.) Moody's assessment that the risk of the Spanish sovereign
losing market access has been materially reduced by the willingness
of the European Central Bank (ECB) to undertake outright purchases
of Spanish government bonds to contain their price volatility. The
rating agency believes that Spain will likely apply for a
precautionary credit line from the European Stability Mechanism
(ESM). This should in turn help sustain demand for Spanish
government bonds by allowing the ECB to activate its Outright
Monetary Transactions (OMT) program of secondary market purchases.
Entry into an ESM precautionary program would not in itself lead to
a downgrade as long as the rating agency believes that the
government is likely to retain access to private capital markets.
2.) Evidence of the Spanish government's continued commitment to
implement the fiscal and structural reform measures that are needed
to stabilize its debt trajectory, as indicated by the package of
fiscal measures announced in July, the changes to the institutional
framework for regional government finances and, more recently, the
announcement of further structural reforms to be implemented in the
coming months. In this respect, Moody's considers the external
monitoring of the Spanish government's implementation of its plans
that would accompany an ESM precautionary credit line to be a
positive factor. The rating agency's base case assumes that the
Spanish government will be successful in gradually reducing its
large budget deficit and arresting the rise in its debt burden.
3.) The ongoing progress towards restructuring the Spanish banking
sector and enhancing the solvency of the affected banks, which
should help to restore market confidence in Spain's banking system
as a whole.
In summary, Moody's believes that the combination of euro area and
ECB support and the Spanish government's own efforts should allow
the government to maintain capital market access at reasonable
rates, providing it with the time it needs to stabilise public debt
over the next few years. In Moody's view, the maintenance of market
access is critical because the risk that some form of
burden-sharing will be imposed on bondholders is material for those
countries that rely entirely or to a very large extent on
official-sector funding for an extended period of time.
The negative rating outlook reflects Moody's assessment that the
risks to its baseline scenario are high and skewed to the downside.
In particular, Spain's credit standing would be negatively affected
by a lack of progress in placing the country's public finances on a
sustainable footing. Shocks at the euro area level could also have
negative repercussions on Spain's rating, for example in the
absence of concrete progress in reforming the euro area's fiscal,
economic and regulatory institutions. The possibility of Greece
exiting the euro area continues to constitute a major event risk
for all the weaker euro area member states. Should any such factors
lead the rating agency to conclude that the Spanish government had
either lost, or was very likely to lose, access to private markets,
then Moody's would most likely implement a downgrade, potentially
of multiple notches.
In addition to the confirmation of Spain's sovereign ratings, the
rating agency has today also confirmed the Baa3/Prime-3 ratings of
the Fund for Orderly Bank Restructuring (Fondo de Reestructuración
Ordenada Bancaria or FROB) and assigned a negative outlook. Spain's
local and foreign-currency bond and deposit ceilings remain
unchanged at A3.
