Spain faces a potential rating downgrade

Escrito el 12 Enero 2009 por Antonio Rivela Rodríguez en Uncategorized

Spain, as a credit counterparty is AAA by both Moodys and S&P.

Being AAA means having the same credit quality as Germany and the U.S.

For obvious reasons , Italy is well below Germany and the US: AA-, which is 3 grades (technically called “notches”) below the abovementioned countries.

Having said that I never understood how come Spain could trade in the same league as our most developed peers. Though being patriotic, I remain realistic as well.

To cut long story short, one of the most reputed rating agencies – S&P – is analysing the Spanish rating with a negative biass, which means that Spain could well be lowered to the AA area, which by the way, is more consistent with our current financial reality.

As a matter of fact Spanish default swap contracts, trade at 100/115 basis points for 5 years.

For non technical readers, a default swap measures the credit cost of an issuer or the insurance to be paid by a market participant wishing to hedge the credit exposure. In this case 100 basis points mean that if an investor wants to get protected of Spain going into a bankruptcy, she or he would have to pay 1% annually on the total notional to be protected, which is quite a lot of money.

See below for S&P opinion on the matter.

LONDON (Standard & Poor’s) Jan. 12, 2009–Standard & Poor’s Ratings Services
today said it had placed its ‘AAA’ long-term foreign and local currency
sovereign credit ratings on the Kingdom of Spain on CreditWatch with negative
implications. A CreditWatch listing signals a potential but not inevitable
change in a rating over the short term. The ‘A-1+’ short-term ratings were

“The CreditWatch placement reflects our view of the significant
challenges facing the Spanish economy as it traverses a period of very weak
growth, and a sustained period of deleveraging, which we expect to lead to a
rebalancing toward traded sectors requiring real exchange rate depreciation,”
Standard & Poor’s credit analyst Trevor Cullinan said. “The likely result of
such factors will be a much weaker potential growth rate over the medium term
than that experienced over the past decade. At the same time, we project a
substantial worsening in the Kingdom’s public finances.”

In our opinion, the credit-driven nature of Spain’s strong growth
performance in recent years has led to a build-up in imbalances, as evidenced
by the sizeable current account deficit (around 10% of GDP in 2008). Due to
the need for the private sector to restructure and deleverage balance sheets,
we believe that the unwinding of the deficit increases the probability of a
protracted economic slowdown. In any case, we expect the rebalancing of the
economy towards a more sustainable growth model will lead to weak growth over
the medium term.

Despite a relatively strong starting position, we expect the Kingdom’s
public finances to deteriorate markedly, with the general government deficit
rising well above 3% of GDP until 2011, and peaking above 6% in 2009. Over the
medium term, there appears to be a need for a reduction in expenditure to a
level more commensurate with lower revenues and a weaker growth outlook.

A resolution of the CreditWatch action is likely this month pending
further information from the Spanish government regarding its response to the
deterioration in the structure of both the economy and its public finances.

“We are in the process of assessing the fiscal consequences of the
current recession and reduced growth outlook, which is expected to lead to a
medium- to long-term rebalancing of the Spanish economy, and to significantly
weaken the government’s budgetary position,” Mr. Cullinan said.

The CreditWatch placement also applies to those institutions with ratings
linked to the sovereign. As a result, the ‘AAA’ long-term ratings on Instituto
de Credito Oficial (ICO), Sociedad Estatal de Participaciones Industriales
(SEPI), and Corporacion de Reservas Estrategicas de Productos Petroliferos
(CORES) have been placed on CreditWatch with negative implications. The ‘A-1+’
short-term ratings have been affirmed. The ‘AAA’ long-term ratings on two
Spanish regions, Autonomous Community of the Basque Country and Autonomous
Community of Navarre, have also been placed on CreditWatch with negative


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