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Spain Bailout Less Likely on Lower Funding Costs: Moody’s

April 09, 2013

Spain is less likely to need a sovereign bailout now than it was in October as funding costs have fallen since then, Moody’s Investors Service said.

“When we did our last rating action we said we do attach quite a high likelihood for Spain’s having to ask for an ESM precautionary credit line -- that is embedded in the current rating,” Kathrin Muehlbronner, an analyst at Moody’s, said in an interview in Madrid today. “At the moment we would see the likelihood as lower than back in October.”

Spain’s funding costs have declined since the European Central Bank last year unveiled a debt-purchase program on secondary markets for sovereigns applying for aid from the European Union’s rescue-fund, known as ESM. Prime Minister Mariano Rajoy has said that while the program is useful, his government will seek to avoid using it.

The yield on Spain’s 10-year benchmark bonds was at 4.74 percent at 12:51 p.m in Madrid, about 300 basis points lower than its euro-era high of July 25, before ECB President Mario Draghi first pledged to hold the euro together. The spread with similar German maturities narrowed to 3.47 percentage points.

Funding Needs

Funding costs in the euro area’s fourth largest economy have come down “significantly,” Muehlbronner said, adding that she welcomed that the Treasury has covered an important part of its “very large” requirements for this year. Still, “at this point in time it isn’t sufficient to move the rating,” she said. Spain’s Treasury yesterday said it has covered 40 percent of its planned mid- and long-term funding for 2013.

Moody’s has a Baa3 rating on Spain, the lowest investment grade. Standard & Poor’s rates the country BBB-, the same level, while Fitch Ratings holds it at BBB, two levels above junk. Investors often ignore ratings, evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011.

Spain’s failure to honor budget-deficit goals has hurt the country’s credibility and justifies a negative outlook on the sovereign’s credit rating, Muehlbronner and Bart Oosterveld wrote in a report published earlier today.

At the same time “Spain’s fiscal performance has improved materially in 2012 compared to 2011,” they said. “This was achieved against the background of a weakening economy and is therefore a positive step towards placing the country’s public finances on a sustainable path.”

Deficit Targets

Spain’s current deficit targets are 4.5 percent of gross domestic product for 2013 and 2.8 percent for 2014. That compares with overspending of 10.2 percent of GDP last year, or 7 percent excluding aid to the banking sector. Moody’s calculates the cost of bank recapitalizations added an amount equivalent to 3.65 percent of output to Spain’s budget gap last year.

Muehlbronner and Oosterveld expect the deficit to reach about 6 percent of GDP this year as public sector employees’ Christmas bonus won’t be scrapped again and pension expenditure has increased by more than 5 percent a year on average over the past five years.

In 2014, a modest return to growth may reduce the deficit to as low as 5 percent of GDP if temporary tax increases introduced last year are maintained, according to the report.’

To contact the reporters on this story: Angeline Benoit in Madrid at; Esteban Duarte in Madrid at

To contact the editors responsible for this story: Craig Stirling at; Paul Armstrong at

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