Overview -- We lowered our sovereign ratings on Spain to 'BBB-/A-3' from 'BBB+/A-2' and assigned a negative outlook to the long-term rating on Oct. 10, 2012. -- We are lowering our long-term ratings on the three special-status Spanish local and regional governments (LRGs) of The Basque Country, Navarre, and Bizkaia to 'BBB+' from 'A'. -- The long-term ratings remain two notches above our long-term rating on Spain, based on our view of the LRGs' higher creditworthiness according to our criteria. -- The negative outlooks on the long-term ratings on the three LRGs mainly reflect the negative outlook on the long-term rating on Spain. Rating Action On Oct. 17, 2012, Standard & Poor's Ratings Services lowered to 'BBB+' from 'A' its long-term issuer credit ratings on three Spanish special-status local and regional governments (LRGs), the Autonomous Community of The Basque Country (Basque Country), the Autonomous Community of Navarre (Navarre), and the Historical Territory of Bizkaia (Bizkaia). We also lowered our short-term rating on Bizkaia to 'A-2' from 'A-1'. The outlooks on the long-term ratings on the three LRGs are negative. Rationale The rating actions follow a similar action on the Kingdom of Spain on Oct. 10, 2012 (see "Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook Negative," published on RatingsDirect on the Global Credit Portal). We rate the special-status regions two notches above the long-term rating on Spain (BBB-/Negative/A-3). According to our criteria, an LRG can be rated one notch higher than its sovereign if we believe that 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. An LRG in the eurozone (European Economic and Monetary Union) can be rated up to two notches above its investment-grade sovereign under our criteria if the LRG also has economic concentration ratios not higher than the range of 40% to 69%. We continue to take the view that the Basque Country, Navarre, and Bizkaia meet the abovementioned conditions and therefore we rate them two notches higher than the long-term rating on the sovereign. Specifically, we consider that their credit profiles are supported by, among other factors, their unique institutional framework, high fiscal autonomy, and highly export-oriented economies that we consider structurally stronger and more resilient than Spain's. Following the sovereign downgrade, we have lowered our assessment of the institutional framework of Spain's special-status regions. This mainly reflects our view that Spain's deteriorating credit quality lowers the likelihood that special-status regions may benefit from central government support. It also reflects our opinion that despite the three LRGs' structural economic strength, the current economic environment will make it increasingly difficult to balance revenues and expenditures, possibly leading to weaker individual credit profiles, as is the case for normal-status regions. We will review the combined impact that the change in our assessment of the institutional framework score and the deteriorating economic conditions in Spain may have on the indicative credit levels (ICL) of the three LRGs as we gain access to relevant updated information about their budgetary execution and economic performance. The ICL is not a rating but a means we use to assess the intrinsic creditworthiness of an LRG under the assumption that there is no sovereign rating cap. The ICL results from the combination of our assessment of an LRG's individual credit profile and the institutional framework where it operates (see "Methodology For Rating International Local And Regional Governments," published Sept. 20, 2010). Outlook The negative outlooks on the long-term ratings on the Basque Country, Navarre, and Bizkaia mirror that on Spain. The outlooks reflect the possibility that we could lower our ratings on these special-status LRGs, should we further lower our ratings on Spain. Furthermore, we could downgrade any of these entities by one notch if we considered that, despite continuing to meet our conditions to be rated above the sovereign, their position in this regard had weakened. We could also downgrade them by two notches (and apply a sovereign cap) if we considered that they no longer met our conditions to be rated above the sovereign. This could happen for example as a result of a worsening in their economic situation vis-a-vis the rest of Spain, or a perception that their degree of fiscal or financial independence was likely to diminish as a result of fiscal underperformance or any other factor. Conversely, we could revise the outlooks to stable if we revised the outlook on Spain to stable and we continued to consider that these entities displayed all the necessary characteristics to be rated two notches above the sovereign. Related Criteria And Research -- Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook Negative, Oct. 10, 2012 -- Ratings On Spain's Navarre, Basque Country, And Bizkaia Lowered To 'A' After Spain Downgrade; Outlooks Negative, May 4, 2012 -- General Criteria: 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 Downgraded To From The Basque Country (Autonomous Community of) Navarre (Autonomous Community of) Issuer Credit Rating BBB+/Negative/-- A/Negative/-- Senior Unsecured BBB+ A Bizkaia (Historical Territory of) Issuer Credit Rating BBB+/Negative/A-2 A/Negative/A-1 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.