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Fitch Ratings-London-07 June 2012: Fitch Ratings has downgraded Spain's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB' from 'A'. The Short-term IDR has also been downgraded to 'F2' from 'F1'. The Outlook on the Long-term IDRs is Negative. Fitch has simultaneously affirmed the common Euro Area Country Ceiling for Spain at 'AAA'.
The downgrade of Spain's sovereign ratings by three notches reflects the following factors:
-- The likely fiscal cost of restructuring and recapitalising the Spanish banking sector is now estimated by Fitch to be around EUR60bn (6% of GDP) and as high as EUR100bn (9% of GDP) in a more severe stress scenario compared to Fitch's previous baseline estimate of around EUR30bn (3% of GDP);
-- Gross general government debt (GGGD) is projected by Fitch to peak at 95% of GDP in 2015 assuming a EUR60bn bank recapitalisation, compared to Fitch's forecast at the beginning of the year of 82% by the end of 2013;
-- 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;
--Spain's high level of foreign indebtedness has rendered it especially vulnerable to contagion from the ongoing crisis in Greece; and
-- The much reduced financing flexibility of the Spanish government is constraining its ability to intervene decisively in the restructuring of the banking sector and has increased the likelihood of external financial support.
The downgrade follows a series of recent steps taken by Fitch:
-- The potential fiscal costs of the restructuring and recapitalisation of Spanish banks initiated in May (see 'Fitch: Spanish Banking Reform Will Require State Assistance' at www.fitchratings.com);
-- Prospects for the Spanish economy in light of the latest episode of the systemic eurozone crisis triggered by the inconclusive 6 May Greek general elections result;
-- The credit and funding profile of regional governments (see 'Fitch Downgrades 8 Spanish Autonomous Communities; Negative Outlook' dated 31 May at www.fitchratings.com); and
-- The overall outlook for public finances following the announcement on 18 May of a second upward revision in the general government budget deficit in 2011 to 8.9% of GDP, compared to 8% estimated by Fitch in its last review of Spain in January.
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. [continue reading the release at Fitch]
In other news:
Bloomberg: "A group of U.S. senators who proposed a $3.7 trillion deficit-reduction plan last year is courting a broader cast of lawmakers to try to avert a fiscal collision at the end of this year."
Bloomberg: "China cut borrowing costs for the first time since 2008 and loosened controls on banks’ lending and deposit rates, stepping up efforts to combat a deepening slowdown as Europe’s debt crisis threatens global growth."
Bloomberg: "Spanish Prime Minister Mariano Rajoy said he’s talking to other European leaders about how to shore up the country’s banks as a lawmaker said the industry may need a $126 billion international bailout."
Reuters: "Chancellor Angela Merkel underlined Germany's readiness to use all instruments to maintain stability in the euro zone on Thursday, fuelling expectations that Spain may soon decide to seek help for its banks beset by bad debts."
Sober Look: "Italy and Spain being in the top 5 is not a surprise, but it looks like France is also a concern to market participants." ("Latest on sovereign CDS activity; Germany makes top five")
Business Insider: "In the never-ending tug-of-war between "labor" and "capital," there has rarely—if ever—been a time when "capital" was so clearly winning." ("DEAR AMERICA: You Should Be Mad As Hell About This [CHARTS]")