Spain’s credit rating downgraded to ‘BBB’

Fitch Ratings
Another downgrade for Spain

Ratings Agency Fitch has downgraded Spain’s credit rating down from ‘A’ to ‘BBB’ with a negative outlook.

Fitch said the three-notch downgrade was a due to mistakes at a European level had allowed the debt crisis to escalate and the ballooning cost of bailing out Spain’s struggling banks. ‘BBB’ is considered to be just above junk bond status.

“Spain is forecast to remain in recession through the remainder of this year and 2013 compared to Fitch’s previous expectation that the economy would benefit from a mild recovery in 2013,” the agency said.

Fitch also gave a stark warning to the British Chancellor, George Osborne, that the UK faced losing its AAA status if the double-dip recession intensified.

Statement from Fitch Ratings

The dramatic erosion of Spain’s sovereign credit profile and ratings over the last year in part reflects policy missteps at the European level that in Fitch’s opinion have aggravated the economic and financial challenges facing Spain as it seeks to rebalance and restructure the economy. The intensification of the eurozone crisis in the latter half of last year pushed the region and Spain back into recession, exacerbating concerns over sovereign and bank solvency. The absence of a credible vision of a reformed EMU and financial ‘firewall’ has rendered Spain and other so-called peripheral nations vulnerable to capital flight and undercut their access to affordable fiscal funding. Spain has been especially vulnerable to a worsening of the eurozone crisis because of the high level of net foreign indebtedness (around 90% of GDP) and fragile confidence in its capacity to implement fiscal consolidation and bank restructuring in a timely fashion.

Spain’s investment grade status remains supported by a relatively high value-added and diverse economy as well as political and social stability despite very high unemployment. Competitiveness and export performance are improving and the trade balance on goods and services is expected to post a surplus this year. The rating is also supported by the Spanish government’s commitment to wide-ranging structural reform to improve the efficiency of public services and strengthen the budgetary and fiscal framework; enhance the flexibility of the labour market; and foster competitiveness and the growth potential of the economy. Moreover, securing public debt sustainability is within reach if the government is successful in reducing its budget deficit to 3% of GDP by 2014 and in light of the economy’s long-run growth potential of between 1.5% and 2% or higher if the structural reform agenda continues to be pursued.

Spain’s investment grade rating is premised on EMU remaining intact and Fitch’s judgment that the ECB, EFSF/ESM, and IMF, will, in extremis, provide financial support to prevent a fiscal funding crisis. Moreover, Spain’s ‘BBB’ rating incorporates Fitch’s expectation that Spain will secure financial support from its European partners for the restructuring and recapitalisation of the Spanish banking sector, though not necessarily a full-fledged policy-conditional external funding programme.

Public Finances

Since Fitch’s last formal review of Spain’s sovereign ratings in January, the 2011 outturn for the general government budget deficit has twice been revised upwards to 8.9% from 8% of GDP. Local and regional governments accounted for around two-thirds of the overshoot relative to the 2011 budget deficit target of 6% and remain a source of fiscal risk. Fitch recently downgraded eight regional governments in light of the expected increase in regional indebtedness and worsening economic and financing environment.

The settlement of outstanding payment arrears incurred by sub-national administrations and other ‘one-off’ operations will increase GGGD by 5.5% of GDP in 2012. Fitch expects that bank recapitalisation will add a further 6% of GDP to government debt during 2012 and 2013. Combined with a worsened outlook for the economy and higher interest payments, GGGD/GDP is projected by Fitch to peak at 95% in 2015 compared to the agency’s previous projection of a peak of 82% in 2013 (the latter broadly corresponds to the government’s current forecasts). Under a scenario whereby the recession is more severe than forecast (-2.7% and -1.5% contraction in real GDP in 2012 and 2013 respectively compared to -1.9% and -0.5% assumed in Fitch’s baseline projections), deficit reduction less rapid (3% primary budget deficit in 2013 compared to 1.4% assumed in the baseline) and bank recap costs are higher (9% of GDP rather than 6%), government debt would peak above 100% of GDP by 2014. Nonetheless, even under this negative scenario, government debt would stabilise reflecting Fitch’s analysis and judgment that public debt sustainability is within reach, albeit at a high level of indebtedness that offers very limited fiscal space to absorb further negative shocks.

You can read the full statement from Fitch here: Spain downgraded to ‘BBB’

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4 thoughts on “Spain’s credit rating downgraded to ‘BBB’

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