(The following statement was released by the rating agency)
Oct 29 - Fitch Ratings has downgraded the Basque Country’s local and regional governments and maintained them on Negative Outlook.
The downgrades reflect the application of Fitch’s criteria “Rating Subnationals Above the Sovereign - Outside US”. The Negative Outlook on all entities has been maintained reflecting the sovereign’s Outlook.
In this criteria, Fitch explains the conditions of eligibility for a subnational to be rated above the sovereign. Fitch considers that local and regional governments within the Basque Country meet these conditions (institutional strength, financial autonomy, economic strength and willingness to service debt) and to date, they have benefitted from the maximum uplift of three notches above that of Spain.
Nevertheless, this maximum leeway of three notches is for sovereigns with a high investment grade rating. When the sovereign falls into the lower investment grade category, the notching uplift narrows due to the weakening predictability of intergovernmental relations and increasing stress.
With Spain being rated at ‘BBB’ and in the context of persisting fragile economic growth, increasing financial risk, and uncertainty on any potential rescue package for the Spanish economy, Fitch believes it is necessary to narrow this notching difference to better reflect the current climate. In October 2012, Fitch’s projections for Spanish GDP for 2013 are for a decline of 1.5% while growth of 1.5% for 2013 was expected in October 2011. Fitch still observes liquidity tensions with refinancing risk not only for public entities but also for large private companies.
The notching difference has been reduced to two notches for the three historical territories of Alava, Bizkaia and Gipuzkoa and the local Government of Donostia-San Sebastian. The historical territories are expected to record comfortable current margins between 2012-2014 and their debt is expected to remain stable. The City of San Sebastian has a moderate debt level, and its level of current margin is expected to remain at 5% in the medium term.
The Basque Country has experienced a two notch downgrade, reflecting not only the application of the criteria, but also a worsening of its financial performance and potential increase in debt. The Basque Country has been more severely affected by the economic downturn and due to the nature of its responsibilities it has seen a worsening of its credit worthiness.
The Transport Consortium of Bizkaia has been downgraded by two notches, reflecting the action taken on the Basque Country. Its ratings are credit linked to those of the Basque Country, and the one notch difference reflects the application of the agency’s “Rating of Public Sector Entities - Outside the United States” methodology published on 5 March 2012 at www.fitchratings.com. Dependent public sector entities owned by subnational governments cannot be rated above the owner (sponsor). The one notch difference between the ratings has been maintained.
With a GDP of EUR66.6bn, the Basque Country is one of the wealthiest regions in Spain. Its GDP per capita was 34.5% above the national average in 2011, and housing prices were estimated to be 50% above the national average. The number of unemployed has grown substantially in past five years, and its unemployment rate is 15.5% versus 25% for Spain in Q3 2012 according to the labour survey performed by the national statistical agency.
The rating actions are as follows:
Autonomous Community of the Basque Country:
Long-term foreign and local currency ratings downgraded to ‘BBB+’ from ‘A’ and Short-term rating downgraded to ‘F2’ from ‘F1’ ; Outlooks Negative