Spain’s credit rating may be cut from Aa1, Moody’s Investors Service said, as the government prepares its final bond sale of the year tomorrow amid concern it may follow Greece and Ireland in seeking a bailout.
Spain has to raise 170 billion euros ($226 billion) next year, while refinancing needs for its regions total 30 billion euros and for banks around 90 billion euros, Moody’s estimates.
“Spain’s substantial funding requirements, not only for the sovereign but also for the regional governments and the banks, make the country susceptible to further episodes of funding stress,” Kathrin Muehlbronner, an analyst at Moody’s, said in a report today.
Spain lost its top rating at Moody’s in September as euro- region leaders struggled to contain the debt crisis. Spain is raising taxes, slashing wages and privatizing state industries to persuade investors it can avoid a rescue. Ireland last month became the second euro nation to get a bailout. The rating will probably remain in the “Aa” range, Moody’s said. The company doesn’t see a bailout as “likely,” even though it “can’t rule it out,” Muehlbronner said.
The euro fell and the extra yield that investors demand to hold Spanish 10-year bonds over German bunds widened to as much as 257 basis points after the Moody’s report, less than 30 basis points shy of a euro-era closing record. The spread eased to 250 basis points at 12:30 p.m. in London.
Bond Auction The move may further increase Spain’s financing costs at tomorrow’s bond sale, when the Treasury plans to auction 3 billion euros of 10- and 15-year securities. Surging yields already prompted the Treasury to reduce planned proceeds from the usual target of around 4 billion euros, Finance Minister Elena Salgado said Nov. 26. Portugal’s borrowing costs almost doubled at a sale of three-month bills today compared with the last auction in November.
“The news is another negative for Spain, and only makes tomorrow’s Spanish bond auctions even more tricky,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “Spain is already struggling to convince market participants that the country can put its own house in order by itself.”
Regional Borrowing Spanish Deputy Finance Minister Jose Manuel Campa said he doesn’t foresee any lack of demand for Spanish sovereign debt next year nor does he expect private issuers to have problems raising financing. Moody’s analysis of the regional governments’ finances isn’t “sufficiently careful,” he told reporters in Madrid today, as those administrations are meeting their budget targets and will continue to do so next year.
Spain, reeling from the collapse of a debt-fueled housing boom, has the highest unemployment rate in Europe at more than 20 percent. The budget deficit, which at 11 percent of gross domestic product last year was the third-biggest in the euro region. Its borrowing costs have surged and the gap between its 10-year yields and those of Germany are 17 times the average in the first decade of monetary union. Also weighing on Spanish debt are plans to make private investors contribute to the costs of future debt crises after 2013. German Chancellor Angela Merkel said today ahead of a European summit that “strict conditions” will be tied to future aid and any help will be “a last resort.”
Banks’ Needs
Moody’s said Spanish lenders may need 25 billion euros for recapitalizations, of which 10.5 billion euros has already been provided by the state’s FROB bank-rescue fund. In a more stressed scenario, that could rise to as much as 90 billion euros, the company said. The FROB was created with an initial 9 billion euros and has the capacity to take on as much as 90 billion euros of debt. Ireland will spend as much as 83 billion euros, more than half its gross domestic product, rescuing its lenders, according to the government.
“Given the nervousness of the markets, given the situation after Ireland where the banks will have to be recapitalized to a much higher capital level, to a core Tier 1 ratio of 12 percent, we ran stress tests to see what that would mean in the context of Spain,” Muehlbronner said in a telephone interview. If Spanish lenders had to be similarly capitalized, to “retain market confidence and absorb potentially higher loan losses,” the figure would be 80 billion euros to 90 billion euros, she said.
‘Relatively Poor’
Moody’s said it’s confident the government is committed to cutting the budget deficit and expects the shortfall to be close to 6 percent of GDP in 2011, compared with 11 percent in 2009. Still, Muehlbronner said the regional governments have a “relatively poor” track record on budget cutting.
The ratings company lowered Spain to Aa1 from Aaa in September. Spain lost its top grade at Fitch Ratings in May and at Standard & Poor’s in January 2009. S&P currently rates Spain AA while Fitch has a AA+ grade. Moody’s said that Spain’s position is “much stronger” than “other stressed euro-zone countries.” A one step cut to Aa2 by Moody’s would leave Spain in line with Italy’s rating and two notches above Portugal. To contact the reporters on this story: Paul Tobin in Madrid at ptobin@bloomberg.net; Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net
To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net
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