Feb 8 - Fitch Ratings has affirmed Spain's Long-term foreign and local
currency Issuer Default Ratings (IDRs) at 'BBB' with a Negative Outlook. The
short-term foreign currency IDR is affirmed at 'F2' and the Country Ceiling at
The affirmation of Spain's sovereign ratings reflects the following key rating
- Fitch projects that public debt will remain under 100% of GDP even given some
assumed fiscal slippage and a continuation of Spain's deep recession in 2013.
This projection also incorporates the cost to the state of bank support, which
the agency judges to be affordable.
- Although these debt projections are sensitive to shocks, Spain's
investment-grade rating reflects Fitch's opinion that the sovereign maintains
some fiscal headroom, albeit significantly reduced. The authorities' commitment
to reducing public borrowing is strong, but the fiscal deficit will take several
more years to be eliminated in structural terms.
- Spain's rating is lower than that of other large advanced economies,
reflecting the relatively large risks to creditworthiness posed by its economic
and financial adjustment within the eurozone. Growth prospects are uncertain,
all sectors of the economy are relatively indebted and unemployment is
- Spain's balance-of-payments adjustment within the eurozone is proceeding at a
faster pace than expected. Fitch has revised up its forecast for Spain's current
account balance and now expects an external balance in 2013 and a small surplus
in 2014. While partly a result of its economic contraction, this improvement
also reflects relatively strong exports and competitiveness gains.
- The Spanish sovereign has demonstrated its financing flexibility and
resilience during the crisis. Public debt's average tenor has been gradually
shortening but remains longer than rating peers at just over six years.
Moreover, the announcement of the ECB's Outright Monetary Transactions (OMT)
programme has materially eased stresses in the peripheral eurozone sovereign
- The rating remains supported by Spain's relatively high value-added and
The Negative Outlook reflects the following risk factors that may, individually
or collectively, result in a downgrade of the ratings:
- Failure to place the public debt ratio on a firm downward path over the medium
- Greater uncertainty over the continuity of Spain's economic and fiscal policy
- A deeper and longer recession than currently forecast. This would undermine
the fiscal consolidation effort, and could erode bank asset quality further than
- A sustained deterioration in fiscal funding conditions caused by an
intensification of the eurozone crisis. This would feed through to tighter
private sector lending conditions and deepen the recession.
Developments that may, individually or collectively, lead to a stabilisation of
the Outlook include:
- A surer prospect of a sustained economic recovery leading to a stabilisation
of the labour market and improved fiscal dynamics.
- Further evidence that Spain's fiscal strategy is yielding substantial deficit
reduction in 2012-13. This would lower the risks around our debt/GDP forecasts.
- Further improvement in Spain's international competitiveness and
implementation of growth-enhancing reforms.
Financing conditions have been relatively benign in recent months. OMT reduces
the tail risk of a sovereign liquidity crisis for Spain and is supportive of the
rating. While it remains uncertain as to whether Spain will request further
official assistance, the request itself would be neutral for the rating.
Growth: Fitch forecasts that the economy will begin to recover in 2014 as
headwinds from fiscal austerity and financing conditions ease. As is currently
the case, the recovery will be primarily driven by net exports; domestic demand
will remain subdued for a longer period. The agency maintains its assumption
that medium term potential growth is 1.5%.
Public finances: Fitch projects that public debt will peak in 2014-15 at around
96% and decline gradually thereafter, assuming an effective interest rate close
to current levels. Medium-term deficit forecasts assume some slippage relative
to official targets.
Banks: Fitch judges that the contingent liabilities from the banking sector have
been adequately sized and that capital injections required from the Spanish
sovereign will not exceed EUR60bn. Nonetheless, if the recession is deeper and
longer than currently anticipated, the risk that the government may be required
to make further injections of capital cannot be discounted. While we have not
factored in the public debt relief that would arise from a partial transfer of
Spanish bank stakes to the European Stability Mechanism, this cannot be ruled
out over the medium term.
Domestic policy: The current rating is based on the assumption that early
parliamentary elections will not becalled before 2015; that the current
administration will broadly maintain its current policy stance; that there will
be no constitutional crisis in Spain; and that future governments will keep
public debt/GDP on a gently declining path in latter half of the decade.
Eurozone policy: The current rating reflects Fitch's judgement that Spain will
retain market access and that EU intervention would be requested in a timely
manner, if needed, to avoid unnecessary strains on sovereign liquidity. Fitch
assumes there will be progress in deepening integration within the currency
union in line with commitments by eurozone policy makers. It also assumes that
the risk of eurozone breakup remains low