Fitch Sees Glimmers of Hope in Spain as it Holds Rating
Fitch Ratings has affirmed Spain’s long-term foreign and local currency issuer default ratings (IDRs) at BBB with a negative outlook. The short-term foreign currency IDR is affirmed at F2 and the country ceiling at AAA.
The credit ratings agency (CRA) said that its ratings rationale reflected the following key factors:
Fitch added that Spain’s negative outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings:
Developments that may, individually or collectively, lead to a stabilisation of the outlook include:
Financing conditions have been relatively benign in recent months. The OMT programme reduces the tail risk of a sovereign liquidity crisis for Spain and is supportive of the rating. While it remains uncertain as to whether Spain will request further official assistance, the request itself would be neutral for the rating.
The CRA also said that its rating reflects the following assumptions:
Growth: Fitch forecasts that the economy will begin to recover in 2014 as headwinds from fiscal austerity and financing conditions ease. As is currently the case, the recovery will be primarily driven by net exports; domestic demand will remain subdued for a longer period. The CRA maintains its assumption that medium term potential growth is 1.5%.
Public finances: Fitch projects that public debt will peak in 2014-15 at around 96% and decline gradually thereafter, assuming an effective interest rate close to current levels. Medium-term deficit forecasts assume some slippage relative to official targets.
Banks: Fitch judges that the contingent liabilities from the banking sector have been adequately sized and that capital injections required from the Spanish sovereign will not exceed €60bn. Nonetheless, if the recession is deeper and longer than currently anticipated, the risk that the government may be required to make further injections of capital cannot be discounted. While the CRA has not factored in the public debt relief that would arise from a partial transfer of Spanish bank stakes to the European Stability Mechanism (ESM), this cannot be ruled out over the medium term.
Domestic policy: The current rating is based on the assumption that early parliamentary elections will not be called before 2015; that the current administration will broadly maintain its current policy stance; that there will be no constitutional crisis in Spain; and that future governments will keep public debt/GDP on a gently declining path in latter half of the decade.
Eurozone policy: The current rating reflects Fitch’s judgement that Spain will retain market access and that EU intervention would be requested in a timely manner, if needed to avoid unnecessary strains on sovereign liquidity. Fitch assumes there will be progress in deepening integration within the currency union in line with commitments by eurozone policy makers. It also assumes that the risk of eurozone breakup remains low.