Wednesday, December 15, 2010

Moody's puts Spain's Aa1 ratings on review for possible downgrade

KUALA LUMPUR: Moody's Investors Service has placed Spain's Aa1 local and foreign currency government bond ratings on review for possible downgrade.

The international ratings agency said on Wednesday, Dec 15 the main triggers for placing the rating on review for possible downgrade are:

(1) Spain's vulnerability to funding stress given its high refinancing needs in 2011. This vulnerability has recently been amplified by fragile market confidence.

(2) A potential further increase in the public debt ratio should the cost of bank recapitalisation prove to be higher than expected so far, whether to meet higher-than-expected asset impairments or simply to retain the confidence of the wholesale markets.

(3) Increased concerns over the ability of the Spanish government to achieve the required sustainable and structural improvement in general government finances given the limits of central government control over the regional governments' finances.

Moody's said it had also placed the Aa1 rating of Spain's Fondo de Reestructuraci''n Ordenada Bancaria (FROB) on review for possible downgrade as the FROB's debt is fully and unconditionally guaranteed by the government of Spain. No further ratings or outlooks have been changed as part of Wednesday's'' rating action.

"Moody's believes that the above-mentioned downside risks warrant putting Spain's rating under review for downgrade", said Kathrin Muehlbronner, Moody's Vice President and lead analyst for Spain.

"However, Moody's also wants to stress that it continues to view Spain as a much stronger credit than other stressed Euro zone countries. This is reflected in the significantly higher rating for the Spanish sovereign. Moody's review will therefore most likely conclude that Spain's rating will remain in the Aa range."

"Moody's does not believe that Spain's solvency is under threat, and in its base case assumptions does not expect the Spanish government to have to ask for EFSF liquidity support. However, Spain's substantial funding requirements, not only for the sovereign but also for the regional governments and the banks, make the country susceptible to further episodes of funding stress. This is one of the drivers behind the review for possible downgrade," says Kathrin Muehlbronner.

The Spanish government will need to raise approximately EUR170 billion (including Treasury Bill roll-over requirements) in 2011, even after taking into account the potential revenues from the recently announced privatizations.

In addition, regional governments have refinancing needs of around EUR 30 billion next year. Moreover, the Spanish banks, whose own funding capacity partly depends on the fortunes of the Spanish sovereign, have around 90 billion euros worth of term debt to refinance in 2011.

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