S&P Cuts Spain to BBB+, Outlook Negative

Adding insult to Bayern Munich injury, we just got S&P which did the impossible and cut Spain to BBB+ from A (outlook negative) not on Friday after hours. Kneejerk reaction is a 30 pip drop in EURUSD. Oh, and most amusing, those witches among men, Egan Jones, downgraded Spain from BBB to BBB-…. a week ago. Crush them, destroy them… How dare they be ahead of the pack as usual: after all their NRSRO application was missing a comma.

Full release:

  • We believe that the Kingdom of Spain’s budget trajectory will likely deteriorate against a background of economic contraction in contrast withour previous projections.
  • At the same time, we see an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector.
  • As a consequence, we believe there are heightened risks that Spain’s net general government debt could rise further.
  • We are therefore lowering our long- and short-term sovereign credit ratings on Spain to ‘BBB+/A-2’ from ‘A/A-1’.
  • 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 impact we believe this will likely have on the sovereign’s creditworthiness.

NEW YORK (Standard & Poor’s) April 26, 2012–Standard & Poor’s Ratings Services today said it lowered its long-term sovereign credit rating on the Kingdom of Spain to ‘BBB+’ from ‘A’. At the same time, we lowered the short-term sovereign credit rating to ‘A-2’ from ‘A-1’. The outlook on the long-term rating is negative.

Our transfer and convertibility (T&C) assessment for Spain, as for all European Economic and Monetary Union (EMU or eurozone) members, is ‘AAA’, reflecting Standard & Poor’s view that the likelihood of the European Central Bank (ECB) restricting non-sovereign access to foreign currency needed for debt service of non-euro obligations is low. This reflects the full and open access to foreign currency that holders of euro currently enjoy and which we expect to remain the case in the foreseeable future.

The downgrade reflects our view of mounting risks to Spain’s net general government debt as a share of GDP in light of the contracting economy, in particular due to:

The deterioration in the budget deficit trajectory for 2011-2015, in contrast with our previous projections, and

The increasing likelihood that the government will need to provide further fiscal support to the banking sector.

Consequently, we think risks are rising to fiscal performance and flexibility, and to the sovereign debt burden, particularly in light of the increased contingent liabilities that could materialize on the government’s balance sheet.

These concerns have led us to conclude a two notch downgrade is warranted in accordance with our methodology (see “Sovereign Government Rating Methodology And Assumptions,” June 30, 2011).

Under our revised base-case macroeconomic scenario, which we view as consistent with the downgrade and the negative outlook, we have lowered our forecast for GDP to contract in real terms by 1.5% in 2012 and 0.5% for 2013. We had previously forecast real GDP growth of 0.3% in 2012 and 1% in 2013.

We believe that negative drags on GDP include:

  • Declining disposable incomes;
  • Private-sector deleveraging;
  • Implementation of the government’s front-loaded fiscal consolidation plan; and
  • The uncertain outlook for external demand in many of Spain’s key trading partners.


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