As by now you must know, only three months after a rating action with stable outlook Moody’s has placed the Kingdom of Spain’s Aa1 rating on review for possible downgrade.
Beyond any remarks regarding the timing of this announcement – one day before an extremely important benchmark auction – there are several considerations that the Spanish Treasury would like to make.
Firstly, it is important to state that Moody’s has not downgraded the Kingdom of Spain. It has simply changed the Aa1 Stable outlook to a Aa1 rating under review for a possible downgrade during the next 3 months. The downgrade may occur if the current macroeconomic situation, the prospects of which have actually improved since September of this year, deteriorates further.
Secondly, Moody’s insists that it does not question the solvency of the Kingdom of Spain and, in this respect, it is very clear in its belief that Spain will not require EFSF assistance.
Thirdly, Moody’s says that even in the worst case scenario in which the review process leads to a downgrade, the Kingdom of Spain would remain in the Aa area, i.e. close to the “safe haven” sovereigns and far from those which are currently most in doubt.
Regarding more specific aspects of the report, there are several points to be made.
• The Treasury’s financial requirements for 2011 will be significantly lower than in 2010, even without taking into account the privatisation of the State Lotteries and Bets agency, and Aena (the National Airport Management agency). Also, the Treasury will start the year from a very comfortable cash position, with no major bond redemptions until the month of April, coinciding with a large intake of taxation revenue. The Treasury would thus remain strong even if the current episode of market volatility were to be prolonged for the first quarter.
• Until now, even in the middle of a period of market turbulence, there have been no significant signs of vulnerability with respect to the Treasury’s ability to access the market. Demand in our auctions has remained strong, and debt holdings by non-residents have tended to increase.
• Although financing costs are higher now, their effect in the aggregate interest burden is not significant, since the cost of most of the debt that is being redeemed is greater than the debt that is being issued. Despite the latest increases, the cost of financing, still low both in historic terms and in comparison to our European peers, does not put its sustainability in doubt.
• As regards the situation in the Spanish banking sector: we must emphasise that, according to the Bank of Spain’s data, the system’s Tier 1 capital is currently at 9.6%. Therefore, Moody’s statement that the system needs EUR 15 billion additional funds to remain above the 8% mark can only be understood in a stressed macroeconomic scenario similar to the one used in July 2010, which is not being experienced today. In this sense, Moody’s does not explain which scenario it has in mind when it affirms that, in a more severe scenario than the current one, recapitalisation needs may exceed EUR 80bn.
• When Moody’s states that, in order to reach 12% Tier 1, the system would require an additional EUR 90 bn, one should be reminded that the 12% mark is an arbitrary one, far away from any present or future standard, even under the Basle III regime in 2019. If Moody’s believes that this should be the standard, it should apply it to every banking institution in the world and not just to the Spanish ones.
• With respect to the Spanish Autonomous Regions, it must be made clear that only two of them will not fulfil their fiscal targets and that, even so, on aggregate they will fulfil these targets.
• As for non-complying Autonomous Regions and Municipalities, the Government has reaffirmed its resolve, backed by the law, not to allow them to incur in further debt operations until they provide sufficient proof of their commitment to fiscal consolidation. This resolve has been shown, for example, with the City of Madrid.
• Moody’s statement regarding the transparency of Autonomous Regions’ accounts, it does not seem to have considered the commitments reached in thelast Fiscal and Financial Policy Council to provide individual, homogenous, quarterly accounts... of their budgetary execution. We must emphasise that this commitment is a new international benchmark of transparency for other countries with sub-sovereign autonomous regional governments. As a sign of this commitment, next week the Government will provide the information on the Autonomous Regions’ budget execution for the third quarter of 2010.
• The calendar for structural reforms of the pensions and collective bargaining system has not been postponed, but actually brought forward: the date to finalise pension reform has been broughtforward to end- January 2011, and the one for collective bargaining has been set for March 2011.
The Government respects every opinion and takes note of what it deems valuable in each of them. It nevertheless believes that the current political economy strategy, with an aggressive and credible commitment for fiscal consolidation, and an equally bold programme of structural reforms – most of which, it must be stated, have already been implemented or announced – will pave the way for a steady economic recovery and a stabilisation of the market’s sentiment towards Spain. Beyond the relatively short-lived horizons of occasional publications that influence (and are also heavily influenced by) the market, we believe that investors will analyse Spanish fundamentals and continue to see Spanish Government debt as a valuable investment.
Spanish Treasury Team