October 11, 2012

Spain Takes S&P Rating Cut

Now one level above junk, country also given a negative outlook

Spain got an unpleasant surprise when Standard & Poor’s not only downgraded the country’s sovereign debt rating two notches to a single level above junk, but also gave it a negative outlook. The ratings agency cited the uncertain economic and political situation in its reasoning.

Bloomberg reported late Wednesday that S&P dropped Spain from BBB+ to BBB- and changed its outlook to negative, as well as dropping the country’s short-term sovereign level to A-3 from A-2.

S&P said in a statement that a “deepening economic recession that could lead to increasing social discontent and rising tensions between Spain’s central and regional governments” magnifies risks.

It added, “The negative outlook on the long-term rating reflects our view of the significant risks to Spain’s economic growth and budgetary performance, and the lack of a clear direction in eurozone policy. The deepening economic recession is limiting the Spanish government’s policy options.” It also cited backtracking by peer eurozone countries on a pledge to cut the link between the government of Spain and its banks as it considers a second bailout.

S&P also expressed concern that the government’s action will likely be constrained by “a policy-setting framework among the eurozone governments that still lacks predictability.”

It said too that recent statements concerning the involvement of the European Stability Mechanism (ESM) in bank recapitalizations raised the issue of whether mutualization of loans to Spanish banks among eurozone countries will actually happen. It added that that possibility was a prime reason that the ratings agency had held Spain’s ratings unchanged on Aug. 1, since it would have allowed Spanish net general government debt to stay below 80% of GDP past 2015.

Ignacio Fernandez-Palomero Morales, deputy head of Spain’s Treasury, said that the move was unexpected and negative for his country. He said in the report that the downgrade was based on a lack of clarity in the plan to resolve the debt crisis.

Spain has been hesitating to request a bailout even after the European Central Bank (ECB) announced an unlimited bond buying program to take the pressure off interest rates for peripheral countries.

Madrid is wary of additional conditions on top of those already required by the European Union. The country has imposed wave after wave of austerity measures that have eaten away at the support for Prime Minister Mariano Rajoy’s government, with the fifth package of cuts only just announced. Rajoy has asked for more information on what additional obligations a bailout might entail.

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