July 17, 2012 / 4:01 PM / 8 years ago

TEXT-S&P affirms Spain's Basque Country

(The following statement was released by the rating agency)

Overview
     -- Spain's Autonomous Community of the Basque Country benefits from a 
predictable institutional framework, and has an export-oriented economy that 
is more competitive than Spain's, in Standard & Poor's view.
     -- We expect the region to take appropriate measures to return to 
operating surpluses and reduce its overall deficit over 2012-2014, in 
compliance with fiscal targets set by the Spanish government.
     -- We are affirming our long-term rating on the Basque Country at 'A'.
     -- The long-term rating remains two notches above our long-term rating on 
Spain, based on our view of the region's strong economic and institutional 
features.
     -- The negative outlook reflects the outlook on the long-term rating on 
Spain.


Rating Action
On July 17, 2012, Standard & Poor's Ratings Services affirmed its 'A' 
long-term issuer credit rating on the Spanish Autonomous Community of The 
Basque Country (Basque Country). The outlook is negative.

Rationale 
We rate the Basque Country two notches above the long-term rating on Spain 
(BBB+/Negative/A-2). This is because we believe the region's credit 
characteristics would be more resilient than the sovereign's in a stress 
scenario.

According to our criteria for rating local and regional governments (LRGs), an 
LRG can be rated one notch higher than its sovereign if it can maintain credit 
characteristics that are more resilient than the sovereign's in a stress 
scenario, has a predictable institutional framework, and displays high 
financial flexibility. However, according to our general criteria, a 
nonsovereign issuer in the European Economic and Monetary Union (EMU or the 
eurozone) that combines high sensitivity to country risk with concentration 
ratios ranging between 40% and 69% can be rated up to two notches above its 
investment-grade sovereign (see "Nonsovereign Ratings That Exceed EMU 
Sovereign Ratings: Methodology And Assumptions," June 14, 2011).

We believe the Basque Country meets the abovementioned conditions and 
therefore apply a two-notch differential to the ratings. 

Specifically, we believe the Basque Country has:
     -- An export-oriented and competitive industry, focused on 
internationally diversified markets, which partly mitigates its concentration 
on Spain's economy (45%). The Basque Country boasts high GDP per capita (134% 
of the Spanish average) and lower unemployment rates than Spain, at 13% 
compared with 24% nationally in first-quarter 2012.
     -- Superior financial features, a strong credit culture, and a sound 
liquidity position, as evidenced by a high "indicative credit level" (ICL). 
     -- A special constitutional and legal status, which grants it strong and 
predictable fiscal autonomy. This includes fiscal legislation, collection, and 
administration powers; independent cash management; and no substantial 
equalization transfers to Spain. The status largely isolates the region from 
negative sovereign intervention.

The ratings on the Basque Country also reflect our assessment of its 
indicative credit level (ICL), which we lowered to 'aa-' from 'aa', although 
we still consider it to be high. The ICL is not a rating but a means we use to 
assess the intrinsic creditworthiness of an LRG under the assumption that it 
is not constrained by the sovereign credit rating. The ICL results from the 
combination of our assessment of the institutional framework where the LRG 
operates, and its "individual credit profile."

The weakening of the ICL was caused by Spain's deteriorating economy, which we 
believe impairs the Basque Country's long-term growth prospects owing to its 
significant economic concentration on Spain. 

At the current level, the ICL also reflects our view of the Basque Country's 
slightly weakened liquidity position, contracting budgetary performance, and 
rising--albeit still manageable--tax-supported debt.

On the positive side, our assessment of the region's ICL factors in our view 
of its predictable and well-balanced institutional framework, wealthy and 
competitive economy, sound financial management, positive liquidity position, 
and very low contingent liabilities. 

Our base-case scenario is driven by the key assumption that the Basque Country 
will moderate its spending to avoid central government intervention. The 
Spanish government has recently amended the institutional framework for 
Spanish regions, increasing the regions' incentives to redress their 
imbalances. Specifically, the central government could now intervene if 
regions do not comply with fiscal targets. 

We expect the Basque Country to post operating surpluses over 2012-2014, 
thanks to a higher increase in operating revenue (2.3% on average) than 
operating expenditure (0.1%).

Regarding revenue, we factor in sluggish nominal GDP growth in 2012-2014, 
impaired by the Spanish economic recession. This weak GDP trend is partly 
offset by some approved tax increases and the positive effect of some net 
settlements of last year's taxes. Our forecast for operating revenue growth is 
more positive than the region's actual performances over the past two years, 
which were constrained by a large contraction of the tax base in 2009. 

In addition, we anticipate that the Basque Country will only moderately 
contain its spending. This contrasts with our expectation for the majority of 
Spanish regions, which will likely aggressively cut their costs. Thanks to the 
Basque Country's strong operating surpluses posted before the 2009 recession, 
we believe it can now take less painful cost-cutting measures to comply with 
the Spanish government's fiscal targets.

As for capital accounts, we assume regional investments will decline after 
their peak in 2010, but should remain above pre-crisis levels. 

Overall, we forecast that the deficit after capital accounts will shrink 
gradually to 6.6% of total revenue by 2014 (from 15% in 2011), and 
tax-supported debt will reach 90% of total consolidated operating revenues by 
2014 (from 71.4% in 2011).

Liquidity
We assess the Basque Country's liquidity as "positive," versus "very positive" 
previously, in accordance with our criteria. 

Our liquidity assessment comprises two components: 
     -- The combination of a liquidity ratio--which reflects the region's 
capacity to cover debt service over the next 12 months based on our estimate 
of internally generated cash--and available liquidity lines over the next 12 
months; and 
     -- Access to external funding.


We estimate that the Basque Country's liquidity ratio will cover its debt 
service by about 1.2x over the next 12 months. Still, the region's capacity to 
cover debt service in the future is mitigated by the lumpy amortization 
schedule for the next few years. The region's debt service for the next 12 
months is EUR384 million, out of which 60% is concentrated in the last quarter 
of 2012. In addition, the region faces higher debt maturities over 2014-2019, 
with an average annual debt repayment of about EUR650 million, which could put 
it under refinancing pressure.

Currently, the Basque Country has short-term credit lines amounting to EUR500 
million, which are now fully disbursed. However, in our monthly treasury 
forecast, we anticipate that the Basque Country will repay these lines in 
September 2012 and that it won't need them again until mid-2013.

We consider the Basque Country's access to external liquidity as 
"satisfactory," according to our criteria. The region has managed to raise 
over EUR650 million in the first five months of 2012, and expects to get a bank 
loan amounting to EUR480 million in July 2012. 

Outlook
The negative outlook on the long-term rating on the Basque Country mirrors 
that on Spain. The outlook reflects the possibility that we could lower our 
ratings on the region should we further lower our ratings on Spain, 
maintaining the two-notch rating differential between both governments.

Given the ICL of 'aa-' for the Basque Country, we do not currently envisage a 
realistic downside scenario under which the ICL would weaken by three notches 
and therefore trigger a downgrade. We would therefore more likely lower the 
rating on the Basque Country following a downgrade of Spain than as a result 
of a change in its ICL. 

Conversely, we could revise the outlook to stable if we revised the outlook on 
Spain to stable.

Regardless of any action on the sovereign, however, we would lower the rating 
on the Basque Country if we saw a weakening of the features that currently 
support the rating differential between the region and Spain. Specifically, 
this could happen should the region exceed its fiscal targets, prompting the 
central government to intervene and thereby undermine the Basque Country's 
financial and managerial autonomy. We consider that such intervention, even 
temporary, wouldn't be compatible with a rating above the sovereign. That 
said, we think this scenario is remote at this stage. 

Related Criteria And Research
     -- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology 
And Assumptions, June 14, 2011
     -- Methodology For Rating International Local And Regional Governments, 
Sept. 20, 2010
     -- Methodology: Rating A Regional Or Local Government Higher Than Its 
Sovereign, Sept. 9, 2009


Ratings List
Ratings Affirmed

The Basque Country (Autonomous Community of)
 Issuer Credit Rating                   A/Negative/--      
 Senior Unsecured                       A                  

 (Caryn Trokie, New York Ratings Unit)
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below