October 17, 2012 / 4:00 PM / in 7 years

TEXT-S&P cuts Navarre, Basque Country, Bizkaia to 'BBB+'

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.
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