Bloomberg News

Spain’s La Mancha Slashed to Junk as Moody’s Cuts 10 Regions

October 20, 2011

(Updates with comment from analyst in fifth paragraph.)

Oct. 20 (Bloomberg) -- Spain’s region of Castilla-La Mancha was cut five levels to junk by Moody’s Investors Service, which also downgraded nine other regions, citing their worsening finances that threaten the central government’s ability to tame the euro region’s third-biggest deficit.

Moody’s cut Castilla-La Mancha to Ba2 from A3 and put it on review for another downgrade. It also lowered Catalonia, Spain’s largest economy, Andalusia, Valencia, Murcia, Castilla-Leon, Extremadura, Madrid, Galicia and the Basque Country, the company said in a statement late yesterday.

The regions face “growing liquidity pressures” and difficulties “reining in their cost base,” Moody’s said. Spain’s weak economic outlook will also limit tax revenue for the regions, said the company, which downgraded Spain’s sovereign rating on Oct. 18.

The move is a further setback to regions at a time when Catalonia, with an economy the size of Portugal’s, is selling debt to its citizens after being locked out of capital markets. It may also undermine confidence in the austerity plan that the People’s Party government of Castilla-La Mancha is implementing after winning control of the region in May following three decades of Socialist rule.

Inheriting Deficit

“Rating agencies are valuing the regions too negatively,” said Angel Laborda, chief economist at Madrid-based Funcas, the savings-bank foundation. “It may be they have high deficits and that they haven’t done their homework but they aren’t insolvent to the point where debt won’t be repaid. On the contrary, their debt and the interest they are paying are very low because of the regions’ short history.”

La Mancha is forecast to have 3.1 billion euros ($4.26 billion) of commercial liabilities at the end of 2011, equivalent to 59 percent of its operating revenue, Moody’s said.

“Poor accountability and inadequate checks and balances have fostered inefficiencies within the administration, which itself has been unable to provide adequate estimates of its fiscal performances over the past year,” the company said.

La Mancha’s president, Maria Dolores de Cospedal, who said the previous government left a larger fiscal hole than it acknowledged, has pledged to narrow the shortfall to 1.3 percent of its gross domestic product in 2012 from 6.5 percent last year, without raising taxes. PP leader Mariano Rajoy, the favorite in opinion polls to win the general election on Nov. 20, supported her program of spending cuts and pledges similar measures on a national level.

Cash Reserves

The regions are behind schedule to meet their deficit target for this year of 1.3 percent of GDP, preliminary government data shows. That shortfall, along with the central government’s deficit and the balance of the social-security system, contributes to the overall public deficit that is targeted at 6 percent of GDP this year.

“Large financing needs alongside constrained access to long-term funding sources have forced regions to deplete their cash reserves, extensively use short-term credit lines, and expand their commercial debt obligations,” Moody’s said.

Catalonia will start selling as much as 4 billion euros of retail bonds on Oct. 24 and is offering a coupon of 4.75 percent on one-year securities and 5.25 percent on two-year notes, the government said on Oct. 6. It is paying the banks that sell the securities, known popularly as patriot bonds, commissions of as much as 2.2 percent.

Moody’s cut Spain’s sovereign-debt rating two notches on Oct. 18, saying the country was vulnerable to a further “escalation of the euro-area crisis.” It also reduced its growth forecasts for Spain and said it would miss its budget- deficit target next year.

--Editor: Andrew Davis, Jeffrey Donovan

To contact the reporters on this story: Emma Ross-Thomas in Madrid at; Angeline Benoit in Madrid at

To contact the editor responsible for this story: Craig Stirling at

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