8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
1/14
Sovereigns
www.fitchratings.com
Special Report Sluggish Recovery Key Riskfor Spain
SummaryFitch Ratings downgraded Spains LongTerm Foreign and LocalCurrency IssuerDefault Ratings (IDRs) to AA+ from AAA on 28 May 2010. The downgrade reflectsFitchs assessment that the process of adjustment to a lower level of private sectorand external indebtedness will materially reduce the rate of growth of the Spanisheconomy over the medium term. Despite these expectations, the Stable Outlook onSpains sovereign rating reflects Fitchs view that the countrys credit profile willremain very strong and consistent with its AA+ rating, even in the event of some
slippage relative to official fiscal targets.The Spanish government has announced an ambitious fiscal consolidation plan toensure a return to sustainable public finances after the global financial crisis. Fitchbelieves the Spanish government could find it hard to implement some of theexpenditure cuts. In particular, the agency has some doubts over the feasibility ofthe cuts that need to be made by Spains autonomous communities, who may alsosee a reduction in the transfers they will receive from the state budget.
Nevertheless, Fitch believes the risk that economic growth will fall short of thegovernments projections is a more important consideration. The Spanishgovernment is forecasting a sharp recovery in private consumption and investment.Fitch believes that Spains unemployment rate, the legacy of its construction boom,and its high level of indebtedness will weigh on private consumption and
investment in the medium term. Consequently, Fitch is forecasting weaker growthfor the Spanish economy in the medium term than the government is, although theagencys projections on the contribution of net trade to growth in the medium termare slightly more optimistic than those of the government.
Real Growth Forecasts(%) 2010f 2011f 2012f 2013f
Spanish government 0.3 1.8 2.9 3.1Fitch 0.5 0.5 1.7 1.9
Source: EU Stability Programme Update 20092013, Fitch
Fitchs analysis suggests that, on its weaker growth forecasts, general government
debt would rise to 70% of GDP by end2011, the same as the AAA median.However, in Fitchs scenario, debt would continue to rise, reaching almost 78% ofGDP at end2013, whereas the government projects debt will peak at 74% at end2012 and start declining. Fitchs analysis assumes that the government implementsall the consolidation measures it has pledged. It also assumes the same stockflowadjustment over 20102013 implicit in the governments Stability ProgrammeUpdate (EUR30bn). This reflects, among other operations, debt issuance to financethe restructuring of the banking sector.
Using a highly stressed scenario on the Spanish banking system assets with veryconservative NPL and lossgivendefault ratios, and assuming no preimpairmentoperating profit and no support from existing shareholders, Fitch estimates that thegovernments already announced EUR99bn for bank system support should be morethan sufficient to cover expected losses. Nevertheless, if the government were toissue the whole EUR90bn of debt resources available for bank restructuring in 2010and 2011, general government debt would rise to 76% of GDP at end2011 and 83%of GDP at end2013. Less than full implementation of the austerity plan, weaker
Ratings
Foreign CurrencyLongTerm IDR AA+ShortTerm IDR F1+
Local CurrencyLongTerm IDR AA+
Country Ceiling AAA
OutlooksForeignCurrency LongTerm IDR StableLocalCurrency LongTerm IDR Stable
Analysts
Eral Yilmaz+44 20 7682 [email protected]
Brian Coulton+44 20 7862 [email protected]
Paul Rawkins+44 20 7417 [email protected]
Related Research
Global Economic Outlook (April 2010)
Spain (research)
Major Spanish Banks: SemiAnnual Reviewand Outlook Asset Quality a Key
Challenge (March 2010)
HighGrade Sovereigns and the Global
Financial Crisis (March 2009)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=429340http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=507905http://www.fitchratings.com/creditdesk/research/issrresrch_new_arcs.cfm?cppv=&tabselected=Rsrch&issr_id=80442206&grp_typ_id=20&res_type=§or_flag=2-3http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=509645mailto:[email protected]:[email protected]:[email protected]8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
2/14
Sovereigns
Sluggish Recovery Key Risk for SpainMay 2010 2
than expected growth, deflation or a larger disbursement for the banking sectorwould further increase debt.
A Closer Look at Spains Growth TrajectoryFitch believes that both demand and supplyside factors may constrain Spainsmediumterm growth prospects. This section examines these factors in more detail.It also looks at two positive factors in Spains growth story: the fact that theinvestment boom was not solely concentrated in housing construction and thepositive contribution of net trade to growth.
Demographic Factors: A SupplySide Constraint on GrowthSpains real growth averaged 3.3% between 2000 and 2008. The growth was drivenpredominantly by demographic factors and increased labour force participationrather than productivity. In fact, Spain experienced a decline in productivity duringthis period, the only EU country to do so, with the exception of Italy. Rising femaleparticipation in the labour force, coupled with very high levels of immigration,
explains the contribution that demographic factors made to growth during thisperiod. Spain recorded the largest increase in the percentage of femaleemployment in the EU. However, the potential increase in female labour supplyover the medium term is likely to be lower, as the level of female participation inthe labour force had converged with that of the euro area in Q309.
50
55
60
65
2000 2003 2006 Q309
Spain Euro area(%)
Female Labour Force Participation
Activity rate, annual average
Source: Eurostat
0
10
20
30
40
50
Q100
Q400
Q301
Q202
Q103
Q403
Q304
Q205
Q106
Q406
Q307
Q208
Q109
Q409
0
1
2
Total pop'n yoy growth (RHS)
Immigrant pop'n yoy growth (LHS)
Total unemployment (LHS)
Immigrant unemployment (LHS)
Immigration and Unemployment
(%)
Source: Eurostat
(%)
There were over 5 million immigrants in Spain at end2009, accounting for almost12% of the population, up from 2.5% of the population in 2000. With the exceptionof Ireland, Spain had the highest percentage increase in foreign participants in thelabour force between 2000 and 2008 in the EU. However, the recent rise inunemployment has disproportionately affected foreign workers, partly because
immigrants are more likely to have been working in the construction sector or on atemporary contract: around a quarter of construction workers are immigrants1 andover half of temporary contracts are used to employ immigrants2.
While Fitch believes the relative attractiveness of working conditions in Spainsuggests immigration will continue to be a feature of the Spanish labour market(over half of Spains immigrant population come from Latin America and Africa3),the agency expects much more subdued immigration flows in the near term. Thenumber of immigrants in Spain declined in H209. This would diminish the positiveeffect on growth that can be attributed to high immigration.
Increasing labour productivity will become more important as a growth driver in theSpanish economy as the contribution of increasing female labour force participation
1 IMF Article IV on Spain, April 20092 OECD Economic Survey, Spain, 20083 OECD Economic Survey, Spain, 2008
1
1
3
5
IE GR ES GB EU FR DE PT IT
Employment (pp)
Productivity (pp)
GDP (%)
Components of GDP
(Average growth rates, 20002008)
Source: Eurostat
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
3/14
Sovereigns
Sluggish Recovery Key Risk for SpainMay 2010 3
and immigration to growth become more subdued. An increase in productivity islikely to require an acceleration of reforms to improve product and labour marketflexibility. While Spains product market is relatively liberalised (ranking seventh
out of 30 OECD countries), the country fares relatively badly overall in the WorldBanks Ease of Doing Business indicators, with very restrictive permanentemployment legislation and barriers to starting up businesses.
Fitch judges Spains supplyside flexibility the capacity of the economy toreallocate labour and capital resources following shocks to be moderatecompared with other highgrade sovereigns4. In particular, the high proportion oftemporary employment contracts in the labour market makes it easier forcompanies to adjust to the economic downturn by shedding staff rather thanreducing wages, resulting in a more marked increase in unemployment than inother highgrade sovereigns.
Wage growth appears to have moderated in Q110 but was still positive. From thepoint of view of maintaining potential growth rates, price rather than quantity
might be a more optimal form of labour market adjustment, as high levels ofunemployment, and especially longterm unemployment, could result in work skillsbecoming obsolete and a lower potential growth rate. While Fitch recognises thatthere are gains to be made from productivityenhancing reforms, these will taketime to be passed into law and implemented and then to have a positive impact onthe growth rate.
High Indebtedness Also Weighs on Future GrowthWhile demographic factors are a supplyside constraint on growth, the overhangfrom the real estate boom and the need for privatesector deleveraging will act asdemandside constraints on Spains mediumterm growth prospects.
10
40
90
140
190
240
290
Gross debt Net debt Net financial wealth
US GB Euro zone ES
Household DebtAs % of household income at Q309
(%)
Source: National authorities, Datastream
Spains household sector is more heavily indebted than the euro area average:household debt equates to 106% of household income in Spain, compared with 95%in the euro zone. Net debt (debt minus household deposits) is 10% of householdincome in Spain, whereas the euro zone household sector is a net creditor to thetune of 9%. Spains gross and net household debt/income ratios compare favourablywith those of both the UK and the US, where household indebtedness is evenhigher.
Nevertheless, net financial wealth (total financial assets held by households minushousehold debt) as a proportion of household income is lower in Spain than in theeuro zone, the US and the UK. This reflects, in particular, the fact that Spanishhouseholds have much lower financial assets in the form of insurance or pension
funds.
4 See HighGrade Sovereigns and the Global Financial Crisis under Related Research on the frontpage
0
10
20
30
ES PT DE FR IT GB
Temporary EmployeesAs % of total employees
Source: Fitch
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
4/14
Sovereigns
Sluggish Recovery Key Risk for SpainMay 2010 4
The ratio of gross household debt toincome has been declining since Q208and at endQ309 had fallen to the same
level it was at Q406. This is similar tothe pattern of household deleveragingin the UK, where the gross householddebt/income ratio peaked slightlyearlier in Q108 and at Q309 had fallento the same level as in Q306. In Spain,net household debt/income peakedearlier than gross debt/income (atQ307), and at Q309 had fallen backalmost to end2005 levels. Thedifference reflects the substantial risein Spanish household deposits, whichcontinued to grow even as the growth in gross debt was levelling off. Net household
debt/income in the UK has followed a similar pattern.
Household sector deleveraging is set to continue to weigh on growth. Spanishhouseholds saving ratio increased significantly over 20082009 to almost 19%,higher than for many of its peers. It is likely to remain high for some time, givenhigh unemployment, the decline in household wealth, and financial constraintsrelated to debtservicing. As such, the potential boost to private consumption fromthe household saving ratio falling back from a high level will be muted. This willlikely prevent the abovetrend bounceback in growth typically witnessed asrecovery progresses.
150
100
50
0
50
100
150
Gross debt Net debt Net financial wealth
GB Euro zone ES
Corporate Sector Debt
At Q309, as % of 2009 GDP
(% GDP)
Source: National authorities, Datastream
While a heavily indebted household sector is a feature Spain shares with the US and
the UK, Spains corporate sector is relatively more indebted and will thereforeincrease the burden of privatesectordeleveraging and weigh on growthprospects. Spains corporate sector isheavily indebted, with gross and net debtto GDP both significantly higher than inthe euro zone as a whole and also theUK. Fitch notes that the construction andreal estate sectors account for almosthalf of the debt owed by nonfinancialcorporates. Overall net financialliabilities (total financial liabilities minustotal financial assets) of the Spanish
corporate sector as a percentage of GDPis also higher than in the euro zone as awhole and the UK.
30
10
50
90
130
170
Q499
Q300
Q201
Q102
Q402
Q303
Q204
Q105
Q405
Q306
Q207
Q108
Q408
Q309
GB gross ES grossGB net ES net
(%)
Households Deleverage
Gross and net household debt/income
Source: Datastream and Fitch
30
60
90
120
150
Q499
Q300
Q201
Q102
Q402
Q303
Q204
Q105
Q405
Q306
Q207
Q108
Q408
Q309
GB gross ES gross
GB net ES net(% GDP)
Less Deleveraging in Corporates
Gross and net corporate debt to GDP
Source: Datastream and Fitch
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
5/14
Sovereigns
Sluggish Recovery Key Risk for SpainMay 2010 5
Deleveraging appears to be progressing more slowly in Spains corporate sectorcompared with its household sector. Gross and net corporate debt/GDP peaked inQ209, marking only one quarter of decline. UK gross and net corporate debt has
continued to rise.Another indicator underlining the indebtedness of the Spanish economy is thedeterioration in the total net external debt burden and international investmentposition (IIP) relative to GDP, which has been driven by the private sectors foreignborrowing. A high external interest bill to service will also constrain domesticdemand. Fitch estimates that Spain would need to achieve a primary currentaccount surplus (the balance on goods, services and transfers, excluding the incomebalance) of 1.4% of GDP to stabilise the net international liability position. Spainrecorded a primary current account deficit of 2.6% of GDP at end2009 whichimplies that domestic demand will have to fall further relative to GDP to achieve asurplus.
0
35
70
105
140
Q199 Q300 Q102 Q303 Q105 Q306 Q108 Q309
ES corporate and household net debt
GB corporate and household net debt
(% GDP)
Spain: High Net PrivateSector Debt
Source: Datastream and Fitch
100
70
40
10
20
50
80
99 00 01 02 03 04 05 06 07 08
GB NXD ES NXD
GB net IIP ES net IIP
(% GDP)
Spain: Net External Debt Also High
Source: IMF and Fitch
Construction Weighs on Growth But Investment Boom Was Not AllHousingThe unwinding of the construction boom will weigh on investment in the mediumterm, constraining Spains future growth. New housing supply is set to contractsharply, as housing approvals fell to 147,000 in December 2009 over the preceding12 months from above 920,000 in early 2007.
2
1
0
1
2
Q295
Q495
Q296
Q496
Q297
Q497
Q298
Q498
Q299
Q499
Q200
Q400
Q201
Q401
Q202
Q402
Q203
Q403
Q204
Q404
Q205
Q405
Q206
Q406
Q207
Q407
Q208
Q408
Q209
Q409
Household consumption Government consumption Investment
Net trade GDP
Quarterly Contribution to Growth: The Importance of Investment
(%)
Source: Datastream
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
6/14
Sovereigns
Sluggish Recovery Key Risk for SpainMay 2010 6
Housing Construction in the EUIE GR ES CY Euro area DK GB
Average weight of housing construction in GDP (%)a 8.6 7.2 6.7 6.6 5.6 5.2 3.1
Average contribution of housing construction toannual growth (%)b
0.5 0.5 0.4 0.6 0.1 0.3 0.2
a 20002009 or 20002008 if not availableb 20012007Source: Eurostat, Fitch
A closer look at the components driving growth in Spain over the last decadeunderscores the importance of investment. At the height of Spains boom in 2007,domestic investment reached over 30% of GDP, the highest rate in Western Europe.During this period, an unsustainable volume of resources was directed to theresidential construction sector. While the increase of household formation due todemographic changes and the increase in population resulting from immigrationpartly justified the increase in housing stock, there was a significant oversupply of
housing by the end of the boom, due in part to an element of speculation on theback of rapidly increasing house prices and cheap labour and credit (Spains entryinto the euro area heralded a period of low real interest rates).
Between 2000 and 2009 (or 2000 and 2008 for countries for which 2009 data is notavailable), the average share of housingrelated construction in GDP was the thirdhighest among all EU member states, after those in Ireland (AA/Stable) andGreece (BBB/Negative). At its peak, residential housing employed over 10% ofSpains workforce.
However, it is important to note that while Spains investment boom and growthtrajectory were partly related to the housing boom, this was not the whole story.The contribution of housing construction to growth averaged 0.43% between 2001
and 2007, less than a third of the average contribution to growth made by totalinvestment. Even at the peak of the boom, housing construction was not the mostsignificant investment by type of asset. Investment in nonhousing construction wasalso significant but the largest share of investments has been in other sectors,including metals, machinery and transport equipment. This suggests that companiesshould be in a good position to take advantage of a pickup in domestic or externaldemand.
6
3
0
3
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total investment Housing construction
Not all HousingContribution to annual growth
(%)
Source: Eurostat
0
7
14
21
28
35
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Housing Other assets
Other constr. EU housing
EU nonhousing EU other
Investment by Asset Type
Spain and EU15
(% GDP)
Source: Eurostat
Net Trade Makes a Positive Contribution to GrowthWhile domestic demand has long made a positive contribution to the Spanisheconomy, net trade has been a drag on growth, particularly in the latter years of
Spains boom. However, the onset of the crisis saw domestic demands contributionto (quarterly) growth turn sharply negative from Q108, seemingly reaching a nadirin Q109 before finishing the year still slightly negative. Net trade, on the otherhand, began to register a positive contribution to quarterly growth in Q108.
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
7/14
Sovereigns
Sluggish Recovery Key Risk for SpainMay 2010 7
3
2
1
0
1
2
Q103
Q203
Q303
Q403
Q104
Q204
Q304
Q404
Q105
Q205
Q305
Q405
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Domestic demand Net trade
Spain quarterly GDP growth Euro 12 quarterly GDP growth
Quarterly Contribution to Growth: Domestic Demand vs. Net Trade
(%)
Source: Datastream
The positive contribution of net trade to growth can be linked to the fact thatimports, which had risen much more quickly than exports in real terms during the
boom, slowed much faster during the downturn. The sharp slowdown in domesticdemand caused import demand to collapse, while exports may have been buoyed bythe reorientation of sectors serving domestic demand towards the export market.Real exports began to grow on a quarteronquarter basis in Q209, after threeconsecutive quarters of contraction. However, real imports bounced back quitevigorously in Q309 (after five consecutive quarters of contraction), suggesting thatthe positive contribution of net trade to growth could weaken in 2010. Imports ofconsumer goods appear to have been the most resilient throughout the downturnand, unsurprisingly, imports of capital goods the worst affected.
15
10
5
0
5
10
15
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Real exports Real imports(%)
Imports Also Return to Growth
QoQ sa growth
Source: Datastream
15
8
1
6
13
20
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Intermediate goodsConsumer goods
Capital goods(%)
Decomposing the Import Recovery
Real sa qoq growth
Source: Datastream
Data on Spains export performance reveals a mixed picture. On an index basis, the
volume of exports of goods and services fell below the euro area average after2005. Spains market share of EU imports declined after 2003 but less sharply thanin France, Italy or Portugal. Furthermore, Spain managed to recover some lostmarket share in the first 10 months of 2009, although the export sector will havebenefited from various temporary fiscal stimulus packages around Europe. On apositive note, Spains real effective exchange rate, which had risen well above thatof other large European countries, began to correct in H208 as the inflationdifferential with EMU fell.
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
8/14
Sovereigns
Sluggish Recovery Key Risk for SpainMay 2010 8
100
110
120
130
140
150
2000 2003 2006 2009
ES Euro area
PT FR
GB DK
Export Performance
Index, 2000 = 100
Source: Eurostat
0
2
4
6
8
1994 1997 2000 2003 2006 10M09
ES IT PT
FI GB DK(%)
Export Market Share
Total EU imports
Source: Datastream and IMF DOTS
From euro adoption until Q408, annual inflation in Spain was around 1pp higher
than the euro area average, eroding Spains international price competitivenessagainst other euro area economies. However, the inflation gap started falling inQ408 and was in negative territory throughout most of 2009. Fitch believes theinflation differential will remain negligible in 2010, removing this pressure fromSpains export performance.
85
95
105
115
125
Q194 Q396 Q199 Q301 Q104 Q306 Q109
ES DE PT
FR FI IT
Real Effective Exchange Rate
ULC, 36 trading partners, 1999 = 100
Source: Eurostat
2
0
2
4
6
1997M01
1998M02
1999M03
2000M04
2001M05
2002M06
2003M07
2004M08
2005M09
2006M10
2007M11
2008M12
2010M01
Difference ES Euro area
(%)
Inflation in Spain and Euro Area
Source: Eurostat
How has this affected Spains current account deficit? The current account deficitfell from 9.7% of GDP in 2008 to 5.4% of GDP in 2009. The fall was drivenpredominantly by the almost halving of the trade deficit (to 4.3% of GDP) and slightimprovements in both the income and transfers deficits. The services surplus alsoincreased slightly, to 2.5% of GDP. Fitch is forecasting a further contraction of thetrade deficit in 2010 and 2011, which should drive the current account deficitlower. Nevertheless, a current account deficit forecast at 4% of GDP in 2011 willstill require external financing.
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
9/14
Sovereigns
Sluggish Recovery Key Risk for SpainMay 2010 9
15
10
5
0
5
10
Q200
Q300
Q400
Q101
Q201
Q301
Q401
Q102
Q202
Q302
Q402
Q103
Q203
Q303
Q403
Q104
Q204
Q304
Q404
Q105
Q205
Q305
Q405
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Goods Services Income Transfers Current account balance
Lower Trade Deficit Brings in Current Account Deficit
(% GDP)
Source: Datastream
Fitch Forecasts Weak Growth in the Medium TermFitchs forecasts on the contribution of net trade to growth in the medium term areslightly more positive than those of the Spanish government, reflecting a slowerrecovery in imports (on the basis of a relatively weaker projected domesticdemand) and slightly stronger export growth projections. Nevertheless, for 20102013, Fitch is forecasting a slower recovery in private consumption and investmentthan the Spanish government, as economic activity is weighed down by highunemployment, the high level of indebtedness of the private sector and the legacyof the construction boom.
The contraction in private consumption in Spain in 2009 was much more markedthan in other large highgrade economies such as France, Germany or the UK, andretail sales continue to decline year on year at a faster pace than in thesecountries. Consequently, the agencys growth forecasts for Spain are more subduedthan the governments. (See Slow Growth Would Hurt the Public Finances below fora discussion of the effect that lowerthanexpected growth would have on thepublic finances.)
How Much Support Will the Banking Sector Need?Spanish banks successfully weathered the first stage of the global financial crisisdue to their low exposure to the US subprime market and complex structuredproducts, prudent regulation (including dynamic loanloss provisioning and strictrules, which reduced incentives to set up offbalancesheet vehicles), and banksmainly retailoriented business model. The banks relative strength is reflected in aBanking System Indicator of B, placing it among the highest 11 Fitchrated bankingsystems.
However, increasing difficulties in the domestic market especially in theconstruction and property development sectors, where credit expansion wasespecially pronounced during the boom years have put pressure on most banks
9698
100
102
104
106
Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411
ES US GB Euro zone
(Index, Q107 = 100)
Slower Growth Forecast for Spain
Real GDP
Source: Datastream and Fitch
April 2010 GEO forecast
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
10/14
Sovereigns
Sluggish Recovery Key Risk for SpainMay 2010 10
asset quality and profitability. Spanish banks are suffering from a sharpdeterioration in domesticloan credit quality through the cycle. Banks nonperforming loans (NPLs) reached 5.1% of total loans at end2009, up sharply from 1%
in 2007. However, this ratio does not include recent debtforassets (includingforeclosed property) and debtforequity swaps by Spanish banks and cajas (unlistedsavings and loan institutions that account for around one half of the assets in theSpanish banking system). Fitch estimates that the ratio of impaired to total loansincluding foreclosed assets (both in the numerator and the denominator) would bearound 8% at end2009.
Using a highly stressed scenario on the Spanish banking system assets, Fitch hasestimated the potential drawdown on resources from the Fund for Orderly BankRestructuring (FROB), which was set up by the Spanish government in July 2009.The FROB, which has a total value of EUR99bn, is funded with EUR9bn of capitaland up to EUR90bn of governmentguaranteed debt. To date, only EUR3bn of debthas been issued by the FROB and the call on its resources amounted to only
EUR2.2bn (to support three different merger processes involving eight cajas).Using very conservative NPL and lossgivendefault ratios, and assuming no preimpairment operating profit and no support from existing shareholders, Fitchestimates that the FROB should be more than sufficient to cover expected losses,given the existence of loan impairment and other reserves of EUR68bn. It should benoted that this analysis ignores the buffer provided by net income. If Fitchsforecasts for preimpairment operating profits for Spanish banks for 2010 and 2011were included, the potential drawdown on FROB assets is even lower. It is alsoworth noting that the stress test includes the loan portfolios of Spains largestbanks, for which Fitch does not anticipate any need to use FROB funds.5 However,Fitch notes that the caja sector is more exposed to the real estate and constructionsectors which could weigh more heavily on its asset quality. Furthermore, therestructuring of this sector is progressing slowly which could intensify constraints onthe supply of credit and affect the pace of economic recovery for the country.
Slow Growth Would Hurt the Public FinancesFitch notes that Spains planned fiscal adjustment is strong relative to austerityplans that have been adopted by other European governments (see table above). Tobring the fiscal deficit down to below 3% of GDP in 2013, the government hasannounced a series of measures through the 2010 budget, an immediate actionplan for 2010, a separate austerity plan for 20112013 and agreements with theautonomous regions and municipalities. These measures reflect a total fiscalconsolidation effort of 5.7% of GDP. Furthermore, in May 2010, the governmentannounced additional measures totalling 1.5% of GDP to accelerate deficitreduction in 2010 and 2011.
5 The IMF has estimated that the FROB might be required to disburse EUR22bn in an adversescenario. See Global Financial Stability Report April 2010 www.imf.org
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
11/14
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
12/14
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
13/14
8/9/2019 Fitch Ratings downgraded Spains LongTerm Foreign
14/14
Sovereigns
Sluggish Recovery Key Risk 14
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READTHESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND
THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE ATWWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROMTHIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST,AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSOAVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.
Copyright 2010 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 18007534824,(212) 9080500. Fax: (212) 4804435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rightsreserved. All of the information contained herein is based on information obtained from issuers, other obligors, underwriters, and othersources which Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of any such information. As a result, theinformation in this report is provided "as is" without any representation or warranty of any kind. A Fitch rating is an opinion as to thecreditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specificallymentioned. Fitch is not engaged in the offer or sale of any security. A report providing a Fitch rating is neither a prospectus nor asubstitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of thesecurities. Ratings may be changed, suspended, or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does notprovide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment onthe adequacy of market price, the suitability of any security for a particular investor, or the taxexempt nature or taxability of paymentsmade in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for ratingsecurities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitchwill rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single
annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment,publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection withany registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of G reat Britain, orthe securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch researchmay be available to e lectronic subscribers up to three days earlier than to print subscribers.
http://www.fitchratings.com/creditdesk/public/ratings_defintions/index.cfm?rd_file=intro