Friday

22nd Jun 2018

Spanish regions downgraded to 'junk'

  • Catalonia's financing problems are worrying investors ahead of regional elections (Photo: Olinta Lopez Rafel)

Moody's ratings agency on Monday (22 October) downgraded five of Spain's biggest regions to "junk" status.

"Very limited cash reserves" as of September and "significant reliance on short-term credit lines" are Moody's main arguments for slashing Catalonia, Andalucia, Castilla-La Mancha, Extremadura and Murcia to below investment grade, where punters take high default risks when buying bonds.

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Catalonia - representing a fifth of Spain's economy - saw its rating cut further into junk territory from Ba1 to Ba3, one month ahead of early elections responding to increased calls for independence.

Moody's warned that the region faces "large debt redemptions" in the coming months, as do Andalucia and Murcia.

The two regions where elections took place on Sunday - Galicia and the Basque Country - saw their rating kept stable, even though another ratings agency, Standard & Poor's last week downgraded Galicia to near-junk level.

The home turf of Prime Minister Mariano Rajoy, where his party scored well on Sunday, Galicia is seen as one of the reasons for Rajoy's hesitation in asking for a eurozone bailout so far.

Moody's regional downgrade comes a week after it kept Spain's overall rating at Baa3, one notch above junk status. But it warned this could go down if Spain does not ask for a rescue package.

A special bond-buying scheme announced by the European Central Bank could be triggered if the Spanish government makes an official bailout request and signs up to deadlines for reforms it has already announced.

Apart from the regional elections taking place in autumn, Rajoy is also hesitating due to conflicting views among EU leaders on when he should ask for help.

France wants him to do it as soon as possible, while Germany and Finland prefer - for domestic reasons - to have the Spanish request come only in November.

The series of downgrades is likely to speed up the process, as investors become increasingly wary of how Spain's financial and economic problems are being dealt with by the eurozone.

A credit line of up to €100 billion has already been set aside by the eurozone bailout fund for Spain's banks. The bank problem has ballooned the country's deficit for this year because the government had to prop up the banks on its own, before receiving EU money.

The European Commission has suggested it will treat Spain as a special case when it examines how Madrid's austerity performance, but the bank bailout is to stay part of government debt.

Last week, after German insistence, EU leaders decided that the bailout fund is not to deal with "legacy debt" when funding banks in the future.

This funding scheme also depends on having a eurozone bank supervisor within the European Central Bank up and running - a process which is likely to take more than a year.

Analysis

Spain's bailout dilemma: not if, but when and how

Markets rallied on Tuesday when two German lawmakers suggested Berlin is warming to the idea of a Spanish bailout. But the wait-and-see game in Madrid is likely to take a few weeks longer.

Greece and creditors proclaim 'end of crisis'

After late-night talks, the Eurogroup agreed on a €15bn disbursement and debt relief measures for Greece, while setting out a tight monitoring when the bailout ends in August.

Greek bailout exit takes shape

At a meeting next week, eurozone finance ministers and the IMF are expected to agree on new cash, debt relief measures, and a monitoring mechanism to ensure that Greece can live without international aid for the first time since 2010.

Opinion

The risks behind the 'green bond' boom

The EU should not overuse the financial system in order to achieve environmental goals, or it risks the emergence of a green bond bubble which would be detrimental to the financial sector and hinder the achievement of climate targets.

Opinion

Eurozone needs institutional reform

Both the examples of Greece and Italy test the limits of a system with inherent weaknesses that feeds internal gaps, strengthens deficits and debts in the European South, and surpluses in the European North respectively.

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