(The following statement was released by the rating agency)
Feb 27 - Fitch Ratings has introduced a temporary investment grade rating floor of 'BBB-'
for Spanish regions whose standalone credit metrics, in an international context, are weaker
than their ratings would
The structurally negative current balances (current revenues less current
expenditure) reported in the past few years, as well as the unlikelihood that
these fiscal results will turn positive in the near future is not indicative of
an investment grade rating. It also means that a number of Spanish regions would
find it difficult, without support from the central government, to meet their
financial obligations. Moreover, to fund existing deficits and commercial
liabilities debt levels have increased sharply in all Spanish regions.
Regions which presently have a weaker standalone financial profile than their
rating level include Catalonia, Castile-La Mancha and Murcia. Fitch is of
the opinion that support from the central government would be forthcoming and timely
given potential negative market reactions to a default by a region and also
because the regions provide essential public services, particularly in the area
of health care and education.
Fitch's rationale for maintaining an investment grade rating floor on Spanish
regions ('BBB-') is, therefore, based on a number of supporting factors that we
believe would help liquidity and also reduce the likelihood of default by a
- The recent budgetary stability law gives the central government much wider
powers to intervene in the finances of a region that does not comply with
deficit targets and therefore instil greater fiscal discipline. As a result,
Fitch believes that most regions will make greater efforts to meet the budgetary
targets and will be given strategic, operational and, if necessary, directions
and financial assistance to do so.
- Debt servicing is given priority by law before payment of salaries as per
article 135 of the Spanish Constitution.
- Existence of the Regional Liquidity Fund (Fondo de Liquidez Autonomica; FLA).
The fund was established specifically to provide funding for regions, some of
which are no longer able to access sources of funding previously available to
them at a reasonable cost. Although in 2012 the FLA did not cover the
refinancing of maturing loans from Spanish banks, Fitch understands that in 2013
it may do so, which would enable some regions to tap this source of funding for
their entire financing needs. For 2013 the FLA is endowed with EUR23bn (2012:
EUR18bn) but the sum can be increased if necessary.
- The fact that the negative tax settlement which should have been repaid to the
state in 2010 and 2011, will now be repaid over a 10-year period thereby easing
the liquidity situation of the regions.
Fitch considers that these features are supportive of a rating floor for Spanish
regions. There are various considerations, however, that would lead Fitch to
review its position including:
- The hypothetical downgrade of the Spanish sovereign by one notch (presently
rated 'BBB'/Negative) would mean that Fitch would be likely to withdraw the
rating floor at 'BBB-' and probably a number of regions would be downgraded to
the 'BB' category as Fitch will not maintain a rating floor at the same level
as the sovereign.
- The inability of regions to turnaround their fiscal situations in the
medium-term which would mean that access to the FLA becomes structural rather
than an alternative or provisional financing option. Fitch expects Spanish
regions to be able to report a positive current balance within a three to four
year time horizon and to be able to tap sources of funding other than the FLA.
If this is not the case, then Fitch would review its position and may withdraw
the floor. In Fitch's view the FLA should only provide a temporary liquidity
mechanism to compensate for the inability of many Spanish regions to presently
fund themselves at reasonable prices in the market and not exist as a permanent
financing mechanism. Indefinite borrowing to cover operational deficits is not
consistent with an investment grade rating.
- Any action by the sovereign that would cause Fitch to doubt the willingness
and timeliness of support.