Thursday, October 13, 2011

S&P Downgrades Spain, Outlook Negative *Economy & banking system expected to weaken further*


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Spain is the fourth largest economy in Europe, behind Germany, France, and Italy


Standard and Poor's Downgrades Spain Standard and Poor's Rating Services on October 13, 2011 downgraded the long-term sovereign debt of the Kingdom of Spain to AA- from AA with a negative outlook. This is a downgrade of 1 level. The action was expected, S&P had placed Spain on negative outlook in February 2011. This action heightens the fear of contagion of the EU Sovereign Debt Crisis. S&P stated:
Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain's main trading partners.
The financial profile of the Spanish banking system will, in our opinion, weaken further, with the stock of problematic assets rising further, as highlighted by the recent revision in our Banking Industry Country Risk Assessment on Spain to Group 4 from Group 3.
As a consequence, we are lowering our long-term sovereign credit ratings on Spain to 'AA-' from 'AA'.
The outlook on the long-term rating is negative.

Factors for Downgrade LONDON (Standard & Poor's) Oct. 13, 2011 - Standard & Poor's Ratings Services today lowered the long-term rating on the Kingdom of Spain from 'AA' to 'AA-', while affirming the short-term ratings at 'A-1+'. The outlook is negative. The transfer and convertibility assessment remains 'AAA', as it does for all members of the eurozone. The lowering of Spain's long-term rating reflects our view of:
●  Spain's uncertain growth prospects in light of the private sector's need to access fresh external financing to roll over high levels of external debt amid rising funding costs and a challenging external environment;
● The likelihood of a continuing deterioration in financial system asset quality as reflected in the recent revision of our Banking Industry Credit Risk Assessment score for Spain to group 4 from group 3 (see "Spain Banking Industry Country Risk Assessment Revised To Group 4 From Group 3 On Heightened Economic Risk", published Oct. 11, 2011);
● The incomplete state of labor market reform, which we believe contributes to structurally high unemployment and which will likely remain a drag on economic recovery.
● Under our recently updated sovereign ratings criteria, the "economic" score was the primary contributor to the lowering of Spain's long-term rating. The scores relating to other elements of our methodology -  political, external, fiscal, and monetary - did not directly contribute.

Vulnerable to Sudden Shifts S&P noted, "While in our view the factors impeding a potential recovery of domestic demand are not unique to Spain, they impact Spain with particular force given its high level of private sector leverage, much of which is funded externally. This is reflected in Spain's negative net international investment position, estimated at 94% of GDP in Q2 2011. A key component of this is short-term external debt, which, at around 50% of GDP in Q2 2011, we view as high. Spanish monetary and financial sector institutions accounted for slightly over one-half of total external debt at the end of Q2 2011, 57% of which is short-term debt. In our opinion, this leaves the economy vulnerable to sudden shifts in external financing conditions. "

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