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Capital Markets

Spain’s regional authorities next in line for downgrade

Madrid and Barcelona among credits likely to be hit by S&P’s lowering of Spain’s sovereign ceiling

Standard & Poor’s has warned that the “creditworthiness” of some Spain-based entities could be affected as a result of its downgrading on Thursday of the country’s long-term sovereign credit rating.

The ratings agency will now consider whether or not these entities can maintain a higher credit rating than the sovereign’s current rating.

“We are assessing what the impact of the Spanish downgrade will have on other entities within the kingdom,” says Alejandro Rodriguez Anglada, primary credit analyst at S&P.

The entities that may be negatively affected by the downgrade are the autonomous communities of Madrid and Aragon, and the City of Barcelona.

Before Spain’s credit rating was downgraded – by one notch from AA to AA-, leaving the outlook on the long-term rating as negative – the three regions held the same rating as the sovereign.

The ratings agency states that “despite signs of resilience in economic performance during 2011, we see heightened risks to Spain’s growth prospects”.

Reasons highlighted for the downgrade were “high unemployment rates, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain’s main trading partners”.

The potential downgrades will be a further blow to Spanish banks, notably the regional cajas – or savings banks – which have large holdings of both sovereign and local authority debt.

Holger Schmieding, Berenberg 
Holger Schmieding,

“As the eurozone falls into recession, we will probably see further downgrades,” says Holger Schmieding, chief economist at Berenberg Bank. “The downgrades are a reaction to recession. This is not really a surprise.”

Alejandro says that S&P “is reviewing the rating of these entities and is doing so as quickly as possible. Nothing has been published on this subject as yet. A more detailed analysis will be published as soon as permitted.”

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