Bloomberg News

Spanish, Greek Turmoil May Trigger Downgrades: Moody’s

June 08, 2012

An exit of Greece from Europe’s monetary union and Spain’s need for financial support to capitalize its banks may trigger additional credit-rating downgrades in the region, Moody’s Investors Service said.

All sovereign ratings in the region, including the Aaa of nations such as Germany, would need to be reviewed if Greece left the 17-nation currency union, New York-based Moody’s said in a statement yesterday. The credit standing of Cyprus, Portugal, Ireland, Italy and Spain would deteriorate as the risk of a Greece exit rose, the company said.

“The worst-case scenario is a Greek exit that destabilizes the European economy, and that feeds into further rounds of challenges,” said Gregory Hess, an economics professor at Claremont McKenna College in Claremont, California. “In turn it would contribute to a ratcheting down of global economic activity.”

Spain’s banking crisis is mostly specific to that country and wouldn’t need to be a source of contagion to others in the region except for Italy, which also has a rising funding reliance on the European Central Bank through its banks, Moody’s said. Spain is preparing to become the fourth euro-area nation to seek emergency assistance as the currency bloc’s finance chiefs plan weekend talks on potential aid to shore up the nation’s lenders.

Conference Call

ECB Vice President Vitor Constancio said yesterday that a Spanish request is “awaited” and will be “exclusively directed at the recapitalization of banks.” The bid may come as soon as tomorrow when finance ministers hold a conference call at about 1:30 p.m., according to a person familiar with the plans who declined to be identified because the matter is confidential.

The prospect of action underscores officials’ concerns that Greek elections on June 17 may unsettle investors as Spain struggles to persuade markets it can protect troubled banks and finance its budget deficit. The country’s credit rating was cut three grades by Fitch Ratings yesterday hours after Prime Minister Mariano Rajoy said for the first time that he is discussing with European leaders how to help Spanish banks.

Deputy Prime Minister Soraya Saenz de Santamaria declined to comment when asked at a briefing yesterday whether Spain was seeking a rescue. She reiterated that the government will wait until getting the reports before making a decision.

International Monetary Fund Managing Director Christine Lagarde urged euro-area policy makers to strengthen the monetary union and share risks as they seek to restore the health of the financial system.

Bank Repair

“The heart of European bank repair lies in Europe,” Lagarde said yesterday in remarks prepared for a speech in New York. “That means more Europe, not less.”

European Union President Herman van Rompuy is drafting proposals on a “fiscal union” that will be discussed by European leaders at a Brussels summit on June 28-29.

A bailout for Spain, reeling from a recession and the bursting of a property bubble, may dwarf previous rescues in the effort to stem the turmoil that began with Greece’s disclosure in 2009 that its finances were in worse shape than previously known.

Since then, European governments and the IMF have made 386 billion euros ($480 billion) in loan pledges to Greece, Ireland and Portugal. Spain’s economy is more than twice the size of the three countries combined. JPMorgan Chase & Co. economist David Mackie said on May 30 that aid for the Spanish government and banks could total 350 billion euros.

Spanish Bonds

Spain’s 10-year bond yields rose to 6.24 percent yesterday from 6.09 percent the previous day, more than double its 3 percent record low in 2005. The euro lost 0.7 percent to $1.2487 at 6:47 p.m. in Madrid.

Fitch downgraded Spain to BBB, within two steps of non- investment grade. It said the cost to the state of shoring up banks may amount to as much as 100 billion euros in the worst case, compared with its previous estimate of 30 billion euros, as the country will remain in a recession next year.

Standard & Poor’s said yesterday that its “base-case scenario” has Spanish banks showing loan losses of 80 billion euros to 112 billion euros this year and next. Fitch said government support of 60 billion euros for the banks would help push the nation’s debt load to 95 percent of gross domestic product in 2015. Spain went into the crisis with a debt-to-GDP ratio of 36 percent in 2007.

To contact the reporter on this story: Dave Liedtka in New York at dliedtka@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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