October 17, 2012 / 4:15 PM / in 5 years

TEXT-S&P cuts ratings on five Spanish regions

     -- 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, 
     -- We are lowering our ratings on five Spanish normal-status regions by 
one to two notches. 
     -- We are affirming our 'BBB-' long-term rating on the Balearic Islands.
     -- The negative outlooks on these six regions reflect, among other 
factors, our negative outlook on the long-term rating on Spain and our view of 
the risk of regional noncompliance with fiscal targets.

Rating Action
On Oct. 17, 2012, Standard & Poor's Ratings Services lowered its long-term 
issuer credit ratings on the following Spanish normal-status regions:

     -- The Autonomous Community of Andalusia to 'BBB-' from 'BBB',
     -- The Autonomous Community of Aragon to 'BBB-' from 'BBB',
     -- The Autonomous Community of Canary Islands to 'BBB-' from 'BBB+',
     -- The Autonomous Community of Galicia to 'BBB-' from 'BBB+', and
     -- The Autonomous Community of Madrid to 'BBB-' from 'BBB+'.

We also lowered to 'A-3' from 'A-2' our short-term issuer credit ratings on 
the autonomous communities of Galicia and Madrid.

We affirmed our 'BBB-' long-term issuer credit rating on the Autonomous 
Community of the Balearic Islands.

The outlooks on all six regions are negative.

The rating actions follow our downgrade of the Kingdom of Spain (see "Spain 
Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; 
Outlook Negative," published Oct. 10, 2012, on RatingsDirect on the Global 
Credit Portal). The characteristics of Spanish normal-status regions mean that 
they cannot be rated above the sovereign under our criteria.

The ratings on the six normal-status regions primarily reflect our view that 
the central government is ready and able to support the regions' debt service 
and fund their fiscal deficits over the rating horizon. This will be done 
through a legally established credit facility--"Fondo de Liquidez Autonomico" 
(FLA)--designed for this specific purpose. 

The FLA's structure and purpose are roughly in line with our previous 
expectations stated in May 2012 (see "FAQ: What's Behind Our Downgrades Of 
Various Spanish Regional Governments," published May 4, 2012). The facility 
has been operational since September 2012 and, in our opinion, has started to 
service regional financial obligations in a smooth and coordinated manner. FLA 
has initially been endowed with EUR18 billion which, in our view, should suffice
until year-end 2012. We expect the FLA to be endowed with about EUR32 billion 
for 2013.

In our view, the central government is strongly committed to ensuring smooth 
coverage of the regions' debt service. Thus, the ratings on the six regions 
are based on the assumption that the central government will: 
     -- Maintain the FLA at least during our forecast horizon (2012-2014) if 
     -- Endow the FLA with sufficient funds to cover both refinancing of 
existing nondomestic debt and deficit targets; and 
     -- Operate the FLA in a flexible manner and with a high degree of 
coordination with Spain's normal-status regions. 

Given current market conditions, we assume that the six regions will request 
adherence to the FLA between 2012 and 2013. 

We understand that major Spanish banks have agreed with the central government 
to roll over their positions with the Spanish regions in 2012-2013. So far, 
Spanish banks have rolled over their exposure to the six rated regions and we 
expect them to maintain this policy. However, the FLA also envisages the 
possibility of covering the maturities of domestic loans if, contrary to our 
current expectation, Spanish banks do not roll them over. We expect some of 
the risk positions of the smaller, lower credit quality banks may be covered 
this way. 

Our decision to align the regions' ratings at the same level as the sovereign 
rating is based on our base-case expectation that Spanish normal-status 
regions will make progress with fiscal consolidation and roughly comply with 
the central government fiscal targets during our forecast horizon (2012-2014). 
Our expectation is based on the assumption that the central government has 
already significantly increased monitoring over the regions, and will exert 
direct control, including taking over management of potentially delinquent 
regions, as contemplated by the Spanish budgetary stability law.

We will review the indicative credit levels (ICL) of the six regions as we 
receive relevant and updated information on their budgetary execution and on 
their liquidity. According to our criteria, the ICL is not a credit rating but 
a means we use to assess the intrinsic creditworthiness of an LRG under the 
assumption that its rating is not constrained by the sovereign. The ICL 
results from the combination of our assessment of an LRG's individual credit 
profile and the institutional framework where it operates.

The negative outlooks on Spain's normal-status regions reflect the negative 
outlook on the sovereign. 

If we lowered the long-term rating on Spain, we would lower the ratings on the 
six regions as we currently assess that Spanish normal-status regions cannot 
be rated above the sovereign under our criteria.

In addition, in the event of a sovereign downgrade, we may decide to revise 
downward our assessment on the institutional framework for Spain's 
normal-status regions, with potential downgrades of several regions by up to 
three notches. This could occur if we considered that diminishing credit 
quality of the central government might result in a lower ability and 
willingness to provide financial support to regions.

Negative triggers for future potential downgrades on each or all of the 
regions also include:
     -- The possibility that the FLA might not function as expected. This 
could occur, for instance, if we see that the central government is not 
injecting funds into the FLA at a pace that ensures a smooth coverage of 
regional funding needs. A failure of the FLA to provide sufficient, reliable 
liquidity support to Spanish regions may result in a credit cliff for Spanish 
regions, with potential downgrades of more than one category, as access to FLA 
currently supports our liquidity assessment on all Spanish normal-status 
     -- The possibility that, despite enhanced control and supervision from 
the central government set in the new budgetary stability law and the royal 
decree-law that introduced the FLA, one or several of the regions may 
materially deviate from budgetary targets, and that the central government's 
policy response may be insufficient, in our view, to redress their 
performance. Depending on the reach or severity of the deviation, we may 
revise downwards our view on the financial management of the delinquent 
regions. If incompliance is widespread and affects several regions, we may 
also review downwards our assessment of the strength of Spain's institutional 
framework for normal-status regions. All else being equal, we expect this 
could result in downgrades of up to three notches. 

We may add negative triggers to individual regions as part of a thorough 
review of their ICLs. 

We could revise the outlook on one or more of the six regions to stable if we 
revised the outlook on the long-term sovereign rating on Spain to stable, and 
if we also believed that the individual ICL was compatible with a stable 

Related Criteria And Research
     -- Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political 
Risks; Outlook Negative, Oct. 10, 2012
     -- FAQ: What's Behind Our Downgrades Of Various Spanish Regional 
Governments, May 4, 2012
     -- 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
                                 To                 From
Andalusia (Autonomous Community of)
Aragon (Autonomous Community of) 
 Issuer Credit Rating            BBB-/Negative/--   BBB/Negative/--
 Senior Unsecured                BBB-               BBB

Canary Islands (Autonomous Community of)
 Issuer Credit Rating            BBB-/Negative/--   BBB+/Negative/--
 Senior Unsecured                BBB-               BBB+

Galicia (Autonomous Community of)
 Issuer Credit Rating            BBB-/Negative/A-3  BBB+/Negative/A-2
 Senior Unsecured                BBB-               BBB+

Madrid (Autonomous Community of) 
 Issuer Credit Rating            BBB-/Negative/A-3  BBB+/Negative/A-2
 Senior Unsecured                BBB-               BBB+
 Commercial Paper                A-3                A-2

The Balearic Islands (Autonomous Community of)
 Issuer Credit Rating            BBB-/Negative/--   
 Senior Unsecured                BBB-               

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 

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