Download Kingdom of Spain

Sovereign Rating Report
28 August 2015
Kingdom of Spain
BBB+
BBB+ (Stable Outlook)
RATING RATIONALE
RATINGS
The key rating drivers supporting Spain’s ratings are:
Institutional strengths that have underpinned crisis management
Issuer
Ceiling
Foreign Currency
BBB+/Stable
AA+
Local Currency
BBB+/Stable
AA+
successes in stabilizing its economy and accomplished a wholesale
restructuring of the banking system.
KEY INDICATORS
An economic recovery that is more robust than the Eurozone
average, and increasingly reliant on exports and productivity gains.
Growth this year will likely surpass 3%, double the Eurozone
average.
A broad commitment to reform-minded economic policy, expected
to continue post legislative elections (due by the end of the current
Growth
Inflation
Gov. Debt/GDP
Fiscal Balance/GDP
Current Account/GDP
Unemployment Rate
2015F
3.3
-0.5
98.7
-4.2
1.0
22.0
2016F
3.0
1.1
98.2
-2.8
1.0
19.7
2017F
3.0
1.4
96.5
-1.4
0.7
17.0
year). The past few years have witnessed a flurry of far-reaching
structural reforms across the economy.
A policy environment in the Eurozone that is increasingly cognizant
of deflation risks. The beginning of a quantitative easing program by
the European Central Bank is helping to counter growth-retarding
deflationary pressures in Spain as well as in other Eurozone
economies.
Spain’s credit ratings were accorded based on
ARC’s sovereign methodologies as available on our
website (www.arcratings.com). The methodologies
utilized are “ARC’s Sovereign Rating Methodology”
dated June 19, 2015 and “Criteria for Assessing
Country Ceilings” dated May 18, 2015.
Eurozone membership that provides the institutional framework for
economic management, and also has been a proven source of
emergency liquidity.
The key constraints on Spain’s credit ratings are:
A large government debt that renders the country vulnerable to
All ratings assigned are unsolicited
swings in market confidence.
An over-leveraged economy with high levels of government,
corporate, and household indebtedness. High levels of nonperforming and doubtful loans dampen prospects for bank-financed
investment, and in turn, growth. Possible further downward
corrections in housing prices continue to be a risk to the financial
system as well as household balance sheets.
A high unemployment rate (22%) and a very high youth
unemployment rate (over 50%) underscore the inefficiencies in the
economy with negative ramifications for fiscal stability.
Lingering contagion risks associated with a possible Greece exit
from the Eurozone, or about the durability of the Eurozone project
itself.
RATING OUTLOOK - STABLE
Spain’s ratings carry stable outlooks, and take into consideration our
expectation that growth in the medium term will be above 1.5-2.0%,
based on continued gains in productivity, and that unemployment
will continue to fall slowly. It also takes into account stability in the
policy thrust despite the election season, and the expectation that
Joan FeldbaumFeldbaum-Vidra
Head of Sovereigns
+1 201 574 5783
[email protected]
EmmaEmma-Jane Fulcher
Chief Ratings Officer
+44 (0) 203 282 7594
[email protected]
broad consensus for fiscal consolidation and structural reform will
persist.
ARC Ratings, S.A.
1
Kingdom of Spain
Sovereign Rating Report
KEY TIPPING POINTS
Positive Turning Points
Negative Turning Points
The trigger for an upgrade would come from sharply
improved competitiveness of the real economy, whereby
much faster paced growth would be achieved (sustained
at >3% pa), also contributing to the rapid reduction in
the country’s government debt burden (to below 85% of
GDP). Such a scenario would likely involve a
transformation the structure of the economy, including
corporate sector consolidation, given the abundance of
micro SMEs, as well as sharply improved prospects for
investment. Spain also
has many world-class
conglomerates with substantial overseas interests,
however.
Triggers that could prompt a rating downgrade would
include a deflationary environment, given the importance
of economic dynamism for growing out of the country’s
large debt burden. More fractured politics would also
exert downward pressures on the ratings to the extent
they could impede fiscal consolidation necessary to
reducing the country’s large government debt burden,
and could also derail the completion of some still
unfinished reforms such as the labor market reform. A
rise in local and regional government arrears – a program
is in place to reduce them – would trigger rating
pressures given the impact on the payments system
economy-wide and also the negative signal provided
about honoring commitments.
Moreover, should Grexit (Greek exit) rise and/or should
membership in the Eurozone for countries such as Spain
come under pressure, ARC would revisit the rating.
Notably, the Spanish government bond market has
weathered the recent events in Greece well.
ARC Ratings, S.A.
2/19
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SUMMARY OF KEY R ATING CONSIDERATIONS FOR SPAIN
(1) ARC’s credit assessment is based on the expectation that Spain will grow by at least 1.5-2.0% on
average over the medium term, its mediummedium-term growth potential.
potential This projection considers that credit
growth conditions will likely remain weak, due to substantial non-performing loans and high corporate and
household leverage, and that fiscal restraint will also be a drag on growth. ARC’s expectation for Spain’s
growth forecasts are based on its ongoing productivity and competitiveness gains and also the longer-term
benefits from many structural reforms enacted during the crisis period and beyond.
(2) Government debt is expected to fall very moderately from its present level of 98% of GDP in the
medium term, and remain high, a key constraint on the rating.
(3) The durability of investor confidence as underpinned by the improved
improved financing environment.
(4) A strengthened external position with current account surpluses expected for the medium-term
containing external debt accumulation. These trends may be reflected in a falling net international
investment position ratio (currently about -100% of GDP). Spain posted its first current account surplus in a
decade in 2013, thanks partly to difficult financial markets.
(5) Stability in Spain’s financial sector,
sector with non-performing and doubtful loans continuing their decline
that began in 2014, and the continued build-up in provisions against problem assets. The loan to deposit
ratio will continue to fall (from about 120% at present (compared to over 150% pre-crisis), and capitalization
ratios will continue to rise. The deleveraging of the economy is a tailwind to growth for the economy
and profitability for the banking sector.
(6) A decline in the unemployment rate over the medium term to pre-crisis levels of below 18% over the
longer term.
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3/19
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1. E CONOMIC G ROWTH AND PRIVATE SECTOR PERFORMANCE
ERFORMANCE
Spain’s growth performance since the crisis substantiates its BBB+ rating. The country is expected to print
3.3% growth this year, more than double that of the Euro Area average. Spain’s post crisis recovery bodes
well for it’s longer-term prospects.
Chart 1:
IMF World Economic Outlook (July 2015)
2013
2014
2015
2016
Spain
-1.2
1.4
3.1
2.5
Italy
-1.7
-0.4
0.7
1.2
Portugal*
-1.6
0.9
1.6
1.8
Euro Area
-0.4
0.8
1.5
1.7
* ARC estimates
In addition to a More Robust Recovery, Spain’s Economic Contraction was Less Precipitous than that
of some other Eurozone crisis countries
Spain’s economy contracted by -7.5% during the crisis period (2009-2013). Difficult financing conditions in
the financial markets, the collapse of bank lending due to formidable asset quality problems in the banks
(particularly in the mortgage sector), the sharp uptick in unemployment and the collapse of confidence all
contributed to the recession. While Spain’s GDP decline was sizeable, it was not as precipitous as those
experienced by other periphery economies, including the Baltic countries. Spain’s per capita income is still
below the level in 2007.
Ireland experienced a -17% contraction, although that economy started recovering sooner (2011). Italy, in
contrast, just started to post positive growth in 1q15. Portugal’s growth problems existed pre-crisis, and its
post-crisis growth performance has also lagged Spain, owed partly to its larger private and public debt and
arguably weaker banking system.
Spain’s Economic Recovery is Relatively Balanced, and Reforms Should Generate LongerLonger-Term
Benefits
Spain’s recovery in 2014 was based on solid growth in domestic demand, helped by falling unemployment.
Fiscal restraint continued to be a drag on growth. Investment growth (3.4%) outstripped private
consumption growth (2.4%), while export growth was 4.2%. Faster paced import growth of 7.2%, due both
to pent up demand and investment spending, meant the external accounts in net terms were a drag on
growth that year in real terms despite the encouraging performance of Spain’s export sectors. In spite of
these developments in 2014, constraints to domestic demand means the external sector is key to the
country’s economic prospects.
The ECB’s quantitative easing program is giving a tangible boost to the Spanish economy, especially
through the exchange rate channel, while credit growth remains constrained across the periphery, including
in Spain. Increasing FDI flows are supportive of growth.
ARC Ratings, S.A.
4/19
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In ARC’s assessment, Spain’s long-run potential growth is above 2%, and perhaps higher should key
reforms generate gains. As in the case of other periphery countries of Portugal and Italy, there is significant
uptapped potential in Spain. While Spain’s decentralized political system -- with the substantial autonomy
of its 17 regions -- encumbers the reform effort, regions and local governments have reigned in their
finances and contributed to the policy thrust.
Spain has Made Substantial Gains in Productivity which are Benefitting the Economy
The charts below depicts Spain’s gains in productivity relative some other key European peers. It suggests
that some of the reforms instituted are already reaping benefits, along with the internal devaluation
underwat. The crisis triggered Spain to embark on a comprehensive reform program that included a labor
market reform, public administration and tax reform, pension reform, and product and service markets
reforms. It restructured its banking system, and has introduced reforms to facilitate corporate debt
restructuring and recovery. It also passed a new securitization law among other measures to promote
capital market development.
Chart 2:
2:
Real Labor Productivity
Legend: -- UK; -- Spain; --France;
--DE;
--IT
---** Spain is Red, UK yellow, France blue, Germany Green, Italy Brown
Source: Eurostat
Spanish Elections Are a Risk
Legislative elections are due by December 20, 2015. Two new parties have changed the complexion of
Spanish politics, and have made the upcoming elections quite unpredictable. Podemos (left of center) won
5 seats in the European parliament, and has gained popularity, likely at a cost to the Socialists (PSOE). One
of Podemos’ mantras is that it believes debt payments should be rescheduled to alleviate the burden on
the population from this fiscal expense. The regional Catalan party, Ciudadanos, is expected to take votes
from the center-right Partido Popular.
Spain has no history of coalition governments, and a long history of stable governments. Likely, a coalition
government will emerge, which will complicate economic policy formation, but ARC expects this influence
to be moderate. Notably, while there has been tremendous economic dislocation due to the crisis, social
unrest has remained largely under control.
With regards to the Catalan call for independence, the regional election in Catalonia produced compelling
results that suggest the issue of secession will not lay to rest. The pro-independence parties together took
just shy of 48% of the votes, and gleaned a majority of seats. While the pro-independence movement is
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5/19
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divided, and does not enjoy majority popular support (the pschological threshold widely believed to
pressure constitutional change), the September 27 result reveals that there exists a very strong separatists
current that could threaten the status quo. The Spanish Constitution blocks Catalonian independence.
ARC Ratings, S.A.
6/19
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Chart 3:
Structural Deterrents to Growth Exist But Improvements are Evident
Overindebtedness
Spanish government is close to 100% of GDP. Because of crisis conditions, government debt more than doubled from under 40% of
GDP in 2008 to this current level. On top of this, non-financial private corporate debt measures 111% of GDP, and household debt
is 71% of GDP, although private debt has continued to fall. Spain’s total (economy-wide) indebtedness over 300% of GDP is
substantially less than Portugal’s of more than 400% of GDP.
Non-performing loans (arrears and doubtful loans) represent 17% of the loan book. NPLs are about 12%. With the economic
recovery underway, doubtful loans are declining. Credit has contracted by 25% since 2009, but this also includes the cleaning up of
the banking system and movement of bad assets to SAREB/FROB. Only corporate lending for sums below €1 million and consumer
loans are exhibiting positive growth.
These difficult lending conditions dampen investment-led growth prospects. Gross investment is below 19% of GDP, compared to
over 30% pre-crisis (albeit much went inefficiently toward the inflated property market).
Unemployment
Spain’s unemployment rate touched 26% in 2012, with the largest segment of the unemployed coming from youth and university
graduates (>50% rate). While these figures do not consider the unofficial economy, they reveal that Spain isn’t operating efficiently.
Structural unemployment has started falling in 2014, and open-ended, long-term contracts are now rising, a positive sign. Skills
deficits and poor English skills contribute to the unemployment problem and are also hindrances to faster growth. Spain has the
one of the highest “early exit from school” rates in the EU and much of the population speaks only Spanish. Large segments of the
Spanish labor force are considered to be unprepared for the new economy and higher value-added and higher-technology work.
Lack of scale in production
There is a pronounced bias in Spain towards small companies. These companies oftentimes lack strong governance and also do not
generate economies of scale. Over 80% of SMEs employ fewer than 10 people, according to the OECD. This same problem is
shared by Portugal. The government is currently exploring ways to correct the impediments to the formation of larger-scale firms
from blossoming in Spain.
Currency inflexibility
Membership in the Euro means that Spain cannot devalue its currency to make competitiveness gains.
Demographics
Secular aging of the population is underway, as is the case for many European countries. The recent pension reform (2013) is
important for the stability of government finances, but the aging of the population means that productivity will slow, holding all else
constant.
Generally slow growth in main export markets
Europe accounts for 50% of Spanish exports (down from 60% pre-Euro). Improving economic conditions in Europe support Spain’s
export-led recovery. A rebalancing away from Europe towards faster growing economies, namely in Asia and Africa, is constructive.
Recovery of the housing market
While many experts believe the price declines in the housing market are behind Spain, risks exist that they have still not bottomed
out. This uncertainty remains a drag on growth.
Spain’s Institutions are a Source of Strength and Contributed to its Successful Crisis Management
Efforts
Spain’s institutional indicators situate it comfortably in the BBB range rating space and have translated into
generally sound government policies. Leading up to the crisis, the Bank of Spain hiked provisioning
requirements by banks. While this move was not sufficient to ward off the banking crisis, it prevented a
deeper crisis from occuring.
ARC Ratings, S.A.
7/19
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Chart 4:
4:
Peer Institutional Indicators
ARC Ratings
Govt Effectiveness
Ease of Doing Business
Competitiveness
Per Capita GDP
Spain
BBB+
83
33
35
$30k
Portugal
BBB-
86
25
36
$22k
Ireland
NR
89
13
25
$51k
Italy
BBB
67
56
49
$36k
India
BBB+
47
142
71
$1k
Source: World Bank, World Economic Forum, ARC Ratings
Higher is stronger for Government Effectiveness; a lower value is stronger for Ease of Doing Business and
Competitiveness Indicators
Chart 5:
5:
ARC’s MediumMedium-Term Macro Outlook Scenarios for Spain
2014
2015
2016
2017
Baseline
Oil prices around $50-60/b; China growing 7.5% pa.
1.4
3.3
3.0
3.0
Fiscal Deficit / GDP %
-5.6
-4.2
-2.8
-2.6
Government Debt / GDP %
98.0
98.0
99.0
102.0
GDP Growth %
Negative
Policy paralysis post elections, incomplete reforms, lack of
investor confidence, higher financing costs, abrupt China
slowdown and weak global demand
1.4
3.3
2.4
2.0
Fiscal Deficit / GDP %
-5.6
-4.2
-3.0
-3.0
Government Debt / GDP %
98.0
98.0
101.0
105.0
GDP Growth %
Positive
Policy continuity, China stability, oil prices stabilize at >60/bb
1.4
3.3
3.3
3.2
Fiscal Deficit / GDP %
-5.6
-4.2
-2.7
-2.4
Government Debt / GDP %
98.0
98.0
97.0
96.0
GDP Growth %
Source: ARC Ratings based on European Commission baseline scenario.
ARC Ratings, S.A.
8/19
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2. G OVERNMENT BALANCE SHEET
Spain’s Large Debt and Slow Prospects for Correction Are Important
Important Factors Underlying ARC’s Rating
Assessment
Spain’s large government debt and the continued posting of sizeable deficits are an important constraints
on its credit quality. The country, pre-crisis, exhibited considerable fiscal discipline and this was key to
enabling it to manage the huge costs associated with its banking system crisis. Debt to GDP has grown
quickly, and it stands close to 100% of GDP. Spain’s debt stock is lower than Ireland’s in terms of GDP, but
Ireland is rapidly reducing its debt burden whereas Spain continues to grow its debt, even if slightly. Spain’s
government debt, however, is much lower than Portugal’s and will correct faster too. It is much lower than
Italy’s as well.
Government sector arrears are a credit consideration. The Supplier Payment Plan was established to assist
the correction of local and regional government arrears/accounts payable. Arrears have fallen but have not
been fully extinguished. Regional and local debts owed to the central government have risen as a result of
these transactions.
Strong Institutions Support Fiscal Flexibility
The institutional strengths of the Spanish government support its BBB+ rating. Spain’s institutional strengths
are underpinned by its revenue yield and the control exerted over local and regional government finances
despite the decentralization of the country. EC membership provides a rules-based fiscal framework as does
the recent adoption of a debt break with a constitutional amendment capping the size of the fiscal deficit to
0.4% of GDP in 2020.
Despite a Large and Growing Debt, Spain’s Fiscal Adjustment has Been Solid
Spain’s fiscal adjustment to date has been solid, incorporating significant reforms. This is partly apparent
from the development of the structural deficit, which shows a sharper improvement than the nominal
deficit. Chart 6 below illustrates that there is still work to be done regarding Spain’s fiscal accounts, despite
the corrections undertaken. Note, fiscal correction is slowing down this year and next, as illustrated by the
expansion of the structural deficit forecasts. Hence, the improvements in the nominal deficit is due to
cyclical rather than structural factors in 2015-2016.
By 2019 the government is committed to a balanced structural deficit. The Spanish authorities anticipate a
faster correction than does the EC.
ARC Ratings, S.A.
9/19
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Chart 6:
6:
Spain’s Fiscal Accounts
2011
2012
2013
2014
Central
-5.1
-4.1
-4.2
-3.5
Regional
-3.3
-1.8
-1.5
-1.7
Local
-0.4
-0.3
-0.5
-0.5
SS
-1.0
-1.0
-1.1
-1.1
TOTAL*
-8.9
-6.6
-6.3
-5.7
EC forecast
EC Structural Deficit
-6.2
-3.5
-2.2
Debt/GDP
2015
2016
2017
2018
-4.2
-2.8
-1.4
-0.3
-4.5
-3.7
96.5
93.2
-2.1
-2.3
-2.7
97.7
98.9
98.5
*excluding 1-off banking sector expenses
Source: Spanish Treasury/European Commission.
Despite the Size, Spain’s Debt Burden is Manageable
Spain’s interest burden to revenues is about 9%, manageable relative to its peers. The cost of issuing debt
averages 3.30%, compared to an average peak cost of 4% in 2011, and the average life of outstanding debt
is over 6.5 years. Since 2011, nonresident investors have been the most important creditor to Spain but this
includes ECB involvement. For the coming year, redemptions amount to 15% of GDP, compared to 20% of
GDP for Italy and 6.5% of GDP for Germany, for example.
Spain has made a voluntary early repayment of €1.5 billion of its €41.3 billion ESM loan taken for banking
sector recapitalization and restructuring. Spain also prepaid its loan in 2012. Spain successfully exited the
ESM programme at the end of 2013.
Reforms are a critical underpinning of stable government finances
Spain established a fiscal authority in 2014, stepped up the fight against tax evasion, instituted a tax reform
(2015), a pension reform (2013), and a far-reaching public administration reform, all of which are important
to public finance stability, especially at the central government level. The authorities have reformed several
public sector loss producing companies (electricity, toll roads) that have stabilized those enterprises’
finances. The far-reaching reform of the banking system led to the migration of contingent liabilities to the
balance sheet of the government, and the substantial rise in government debt.
The labor market reform and tax reform should help bolster productivity and competitiveness, with positive
implications for government revenues. As part of the tax reform, payroll taxes were reduced, and the
corporate tax rate was lowered. The labor market reform tackles the high structural and youth
unemployment, and wage indexation, and labor market inflexibilities. There is a new government subsidy
system to incentivize hiring.
Rationalizing healthcare, education and social spending in the regions is incomplete.
ARC Ratings, S.A.
10/19
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Spain’s Eurozone Membership Helps Insulate the Economy from Default
By many measures, Spain’s government debt is very high. While the fiscal tightening effort has waned,
structurally-speaking, continued progress on reducing the debt burden is essential to containing fiscal risks.
Fiscal developments will be a key consideration for rating migration.
ARC views Eurozone membership as a key support factor in that it helps provide the framework for fiscal
consolidation, and also provides – as demonstrated – emergency liquidity and support. It substantiates
ARC’s BBB+ rating of the sovereign.
The Eurozone authorities pledge their commitment to keeping the currency union intact. The EU
institutions, including the ECB, appear to be following their pledge to do “whatever it takes” to stabilize the
Eurozone. The new institutions and procedures established – including the establishment of the European
Stability Mechanism, the European Semester and the roadmap for a banking union and single supervisory
mechanism – have helped afflicted countries tremendously in dealing with liquidity pressures.
Chart 7:
7:
Spain’s Main Government
Gover nment Debt Peer Comparatives (2015E)
BBB+
BBB-
BBB
NR
Spain
Portugal
Italy
Ireland
Govt Debt/GDP
102
124
133
110
Govt Debt/Revenues
265
285
290
300
9
11.5
10
11
-4.5
-3.1
-2.6
-2.9
Govt interest Payments / Revenues
Fiscal Balance/GDP
Source: European Commission; Ministry of Finances of Respective Countries. Ratings are by ARC Ratings.
Note EC projection for government debt/GDP in Spain is 102%, and government projection is 99%.
ARC Ratings, S.A.
11/19
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3. E XTERNAL BALANCE
AL ANCE S HEET
Spain’s Export Sector is Increasingly Contributing to the External Account Improvements
As a reserve currency country Spain’s external accounts serve to indicate overheating or efficiency issues,
rather than exchange rate related risks.
Spain’s external accounts have undergone a major transformation since the crisis. Leading up to the crisis,
over-borrowing and excessive liquidity contributed to large current account deficits, symptoms of the
overheating in many segments of the economy. Since the crisis, the collapse of domestic demand and lack
of availability of credit caused a large-scale contraction of the current account deficit. Spain’s current
account has recorded a surplus since 2013, after ballooning to a deficit in the magnitude of -10% of GDP in
2007. Low oil prices are supportive of Spain’s current account surplus position, as it is a net importer of
energy.
Gains in the export sector, reorientation of export destination markets beyond the Eurozone, more
favorable terms of trade (thanks in part to recent commodity price developments and ECB quantitative
easing) have given a bigger boost to exports this past year. As such, the external account developments are
increasingly being characterized by export performance rather than demand constraints. In 2014, however,
the contribution of net exports to growth turned negative due to import demand. Export of goods growth
y/y in April printed 6.5%, substantially higher than earlier years.
The internal devaluation witnessed in Spain has provided a boost to competitiveness relative to its peers,
also underpinning the generally favorable developments in the external accounts.
Chart 8:
Relative Unit Labor Costs (OECD 2010=100)
2010
2012
2013
2014
Germany
100,0
96.6
100.1
102.7
2015
99.0
Spain
100,0
89.7
89.1
89.2
85.1
Portugal
100,0
91.0
94.0
93.5
88.9
Italy
100,0
95.5
96.7
98.6
93.9
Ireland
100,0
90.9
95.0
95.3
89.2
Source: OECD
Spain’s Large Negative Net IIP Reflects its Large Debts, Mainly, although also the Internationalization
of the Economy
Spain’s large debts, both public and private, are also manifested in the large net international investment
position deficit, equivalent to almost 100% of GDP. The figure would be higher if not for the large
investments of Spain’s dynamic and internationalized corporates abroad that augment international assets.
Spain’s ratio is about the same level as Ireland’s even as that country’s large negative net IIP has more of an
equity component. Italy’s net IIP/GDP is -30%. Portugal’s is close to -120%.
ARC Ratings, S.A.
12/19
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4. FINANCIAL SECTOR PROFILE
Post crisis and restructuring, vulnerabilities remain high, but mostly in terms of possible continued negative
asset price and credit supply developments, as well as concerns about credit quality. In 2014, almost all
pockets in Spain exhibited housing price increases but it is too soon to know if this trend will be sustained.
Spain’s banking sector continues to be a drain on both the country’s credit rating and also growth.
All banks in Spain except one (Liberbank) passed the ECB’s Asset Quality Review stress test last Fall 2014,
and that bank had lined up capital in advance of the announcement.
Chart 9:
9:
Select Banking Crisis Facts
Problem banks were divided into 3 groups. The first 2 groups could not access private capital and were intervened. The third
grouping was relatively healthy.
€56B in aggregate for groups 1 and 2 was needed in capital. 70% was fulfilled by public injections via FROB, 23% by bail-in of
junior creditors, and 6% (>€25B) was sourced from private capital.
In 2013 the government owned 18% of the system.
€51B of problem assets, mostly problem mortgages, were transferred to SAREB, at 47% of book value, cleaning up the banks’
balance sheets.
€41B (including capitalization funds for SAREB) of EC emergency support was used (4% of GDP), compared to €100B initially
anticipated.
Pre-crisis, the Spanish authorities’ supervision of the banking crisis was stricter than in some other countries,
and higher provisions were required in face of rapid credit growth, helping contain the risks, even if
insufficient.
Recent news on Credit Growth Conditions is Mixed
Spain is turning a corner, with credit growth in a few areas of the economy starting to pick up again (small
loans and consumer lending), as the reduction in doubtful loans (thanks to improved growth conditions) has
allowed the coverage ratio to reach 47% from 36% in 2012. Measures to promote non-bank financing,
including a recent securitization law, are positive for growth.
Slow deleveraging has reduced total private sector debt to 182% of GDP from over 200% of GDP in 2011.
Mortgage borrowers are not able to walk away from mortgages, despite some mild reforms of the
mortgage law, so this impedes the natural deleveraging cycle. In December 2014, a law was passed that
allows persons in arrears on mortgage payments to be shielded from eviction. Spain’s household debt is
among the highest in the Eurozone at close to 80% of GDP and 120% of disposable income. (Slightly better
than Portugal’s numbers).
As illustrated in the following chart, deposits have not rebounded to pre-crisis levels, thanks to the sticky
high unemployment and cash needs; lending has not been reinvigorated except in a few segments.
ARC Ratings, S.A.
13/19
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Sovereign Rating Report
Chart 10:
10 :
Credit and Deposits
Credit Total
a
Doubtful
b
Arrears
(b) % Total
(a+b)
(a+b) % Total
Deposits
2009
2 386
97
79
3.3
176
7.4
2 320
2010
2 387
111
87
3.6
198
8.3
2 300
2011
2 358
143
110
4.7
253
10.7
2 307
2012
2 230
172
135
6.1
307
13.8
2 298
2013
1 926
202
150
7.8
352
18.3
2 065
2014
1 805
178
134
7.4
312
17.3
1 997
Apr-15
1 778
167
130
7.3
297
16.7
1 971
2009-15 (%)
-26.4
72.2
64.6
68.8
-15.0
* Source: Bank of Spain
Total credit has contracted by over 26% since 2009, and deposits are 15% below the level at end 2009.
Arrears and doubtful loans are down both as a percentage of outstanding loans and also in absolute terms,
with the trend reversal starting in 3q2014. Coverage against doubtful loans has also climbed to close to
50% from 36% in 1q12.
Spain’s banks are very internationalized, with 33% of assets abroad. The largest exposure is the UK (27% of
the international book), followed by 15% in the USA, and almost 10% in Brazil. International assets have
performed better than domestic ones. Portugal is the biggest problem exposure in terms of asset quality,
with 6% of Spanish bank assets in Portugal impaired, but Portuguese assets are less than 5% of banks’ total
exposure.
ARC Ratings, S.A.
14/19
Kingdom of Spain
Sovereign Rating Report
APPENDIX 1. SPAIN STATISTICS
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
3.7
4,2
3,8
1.1
-3.6
0.0
-0.6
-2.1
-1.2
1.4
3.3
3.0
--
--
43.7
44.4
45.2
46.0
46.4
46.6
46.7
46.8
46.6
46.5
--
--
--
--
Nominal GDP ($b)
1158.0
1266.0
1481.0
1642.0
1503.0
1434.0
1496.0
1356.0
1394.0
1420.0
1300.0
--
--
--
Nominal GDP (EURb)
1362.4
1665.8
2177.9
2280.6
2178.3
1912.0
1942.9
1784.2
1909.6
1820.0
1450.0
--
--
--
3.7
2.7
4.2
4.1
-0,2
2.0
3.1
2.4
1.5
-0.2
-0.5
1.1
--
--
30.0
31.0
30.0
25.0
24.0
22.0
20.0
19.0
19.0
19.0
19.0
--
--
--
Real GDP
Population
Inflation (CPI)
GFCF/GDP
1.8
4.9
8.3
-0.8
-11.0
9.4
7.4
1.2
4.3
4.2
5.5
6.0
--
--
Nominal Net Exports of G&S
--
--
--
--
--
--
--
1.6
3.4
2.4
2.4
2.3
--
--
Unemployment
--
Real X Growth
--
--
--
--
--
--
21.4
24.8
26.1
24.4
22.0
19.7
--
o/w Youth unemployment rate
--
--
--
24.5
37.7
41.5
46.2
52.9
55.5
53.2
--
--
--
--
LT unemployment rate
--
--
--
2.0
4.3
7.3
8.9
11.0
13.0
--
--
--
--
--
General Government Balance/GDP
General Govt Debt/GDP
1.2
2.2
2.0
-4.4
-11.0
-9.4
-9.4
-10.3
-6.8
-5.6
-4.2
-2.8
-1.4
-0.3
42.0
39.0
36.0
39.0
53.0
60.0
69.0
84.0
92.0
98.0
98.0
99.0
102.0
100.0
2.5
--
--
--
--
--
--
--
2.9
3.3
3.3
3.1
2.8
2.6
4.0
4.0
4.0
4.0
5.0
5.0
7.0
8.0
9.0
9.0
9.0
9.0
9.0
8.0
GG Revenues/GDP
40.0
41.0
41.0
37.0
35.0
36.0
36.0
37.0
37.5
37.8
37.8
37.8
38.0
38.1
GG Debt/Revenues
107.0
96.0
87.0
107.0
151.0
166.0
192.0
228.0
246.0
258.0
250.0
250.0
245.0
240.0
Interest/GDP
GG interest expense/Revenues
Relative Unit Labor Costs 2010=100
CAB/GDP
Net IIP/GDP
TOT % Change (2000=100)
--
--
--
--
--
100.0
97.6
89.7
89.1
89.2
85.1
--
--
--
-6.6
-8.2
-9.2
-8.9
-4.1
-3.9
-3.2
-0.3
1.4
0.8
1.0
1.0
--
--
-54.0
-64.0
-76.0
-77.0
-91.0
-87.0
-89.0
-90.0
-94.0
-95.0
-98.0
-100.0
--
--
--
--
--
--
--
--
--
94,8
96,2
95,8
97,3
96,9
--
---
--
--
--
--
--
--
--
106.1
108.4
109.0
111.0
111.0
--
0.9
0.8
0.7
0.7
0.7
0.8
0.8
0.8
0.7
0.8
0.9
0.9
--
--
REER (2000=100)
--
--
--
--
--
--
--
92.1
92.4
91.6
87.5
86.7
--
--
Corporate Sector Gross Operating Surplus % GDP
--
--
--
--
--
--
--
23.1
23.1
23.0
22.6
22.3
--
--
Gross NFPC Debt/GDP
--
--
--
--
--
--
132.0
125.0
118.0
111.0
111.0
--
--
--
Gross HH Debt/GDP
--
--
--
--
--
--
81.0
79.0
75.0
71.0
71.0
--
--
--
=Total Private Debt
--
--
--
--
--
--
213.0
204.0
193.0
182.0
182.0
180.0
--
--
Fin'l Sector Equity/Assets
--
--
--
--
--
--
6.4
6.4
6.8
7.9
8.1
--
--
--
Banks LTD %
--
--
--
--
--
--
151.0
151.0
130.0
123.0
119.0
--
--
--
Market Performance of Exports (2000=100)
Exchange Rate ($/Euro)
Source: European Commission, IMF, ARC, national sources.
ARC Ratings, S.A.
15/19
Kingdom of Spain
Sovereign Rating Report
APPENDIX 2.
INVESTMENT WATCH
ARC Sovereign Ratings Outlook:
STABLE
Election Watch:
National Parliament / Government:
due by December 20, 2015
Regional - Catalonia:
September 27, 2015
Regional - Basque Country:
October, 2016
European Parliament:
May-June 2019
Budget for 2016:
State Budget passed by Parliament:
August 1, 2015
EU Developments to Watch through 2016
ARC Ratings, S.A.
EU Fall Forecasts
November 2015
ECB's Quantitative Easing Expiration / Renewal
September 2016
16/19
Kingdom of Spain
Sovereign Rating Report
MEDIUM AND LONGLONG-TERM ISSUERS
Low Risk Range
AAA
An obligor rated “AAA” has the highest possible Issuer’s Credit Rating assigned by ARC Ratings. It has not only the
ability to show an extremely strong capacity to meet its financial commitments but is also benefited by a full set of
circumstances that actually turn the possibility of credit default into a strictly remote event.
AA
An obligor rated “AA” also has very strong capacity to meet its financial commitments. It differs from the highest
rated obligors only in a very small degree.
A
An obligor rated “A” has a quite strong capacity to meet its financial commitments but is somewhat more
susceptible to the adverse effects of changes in circumstances and economic conditions when compared to
obligors in highest-rated categories.
Moderate Risk Range
BBB
An obligor rated “BBB” exhibits an adequate capacity to meet its financial commitments. However, adverse
economic conditions or suddenly changing circumstances are more likely to lead to a weakened capacity to the
obligor to meet its financial commitments.
BB
An obligor rated “BB” exhibits a fair capacity to meet its financial obligations. However, it faces major on-going
uncertainties or exposure to adverse business, financial or economic conditions, which could lead to an unforeseen
deterioration of the obligor’s capacity to meet its financial commitments.
High Risk Range
B
An obligor rated “B” is more vulnerable than the obligors rated “BB”, in the sense that its capacity to meet its
financial commitments may, under adverse business, financial or economic conditions very likely impair such
capacity or even the willingness to service its debts.
CCC
An obligor rated “CCC” is currently very vulnerable, and is thus strictly dependent upon favourable business,
financial and economic conditions to meet its financial commitments.
Imminent or Actual Default
CC
An obligor rated “CC” is highly vulnerable to not being able to meet future obligations, although not showing
payment delays at present.
C
Default would appear to be imminent. A debt restructuring procedure may be under way either by creditors’ own
initiative or through a judicial ordinance.
D
A “D” rating is assigned when the obligor is currently in default.
The ratings from “AA” to “CCC” may be modified by the addition of “+” or “-” to show their relative standing within their own rating categories.
The rating outlook (positive
positive,
positive stable,
stable negative or developing)
developing highlights the potential direction of a rating during the following year. An outlook is not
necessarily a precursor of a rating change or future follow-up ahead of schedule.
*
ARC Ratings has updated its Rating Definitions on June 18, 2013, maintaining the equivalence between the notations before and after the
update.
All remaining rating definitions can be accessed
acces sed at www.arcratings.com
ARC Ratings, S.A.
17/19
Kingdom of Spain
Sovereign Rating Report
Ratings assigned by ARC Ratings represent opinions on the capacity and willingness of an entity to make all required payments on a
given obligation in a timely manner.
The rating(s) assigned by ARC Ratings in this report are unsolicited by the entity whose financial commitments are subject to rating.
Prior to the assignment or revision of a rating ARC Ratings provides to the entity whose financial commitments are subject to rating the
documents that substantiate the rating to be attributed. This entity is thus given the opportunity to clarify or correct factual details,
thus allowing the rating assigned to be as accurate as possible. The comments made by the entity whose financial commitments are
subject to rating are taken into account by ARC Ratings in the assignment of the rating.
ARC Ratings historical default rates are published in the European Securities and Markets Authority Central Repository (CEREP) which
can be accessed in the website cerep.esma.europa.eu/cerep-web/. ARC Ratings default rate is the probability of lack of full and timely
payment of capital or interest or of the occurrence of any event that explicitly indicates that the future full and timely payment of those
commitments will not occur (e.g., in case of insolvency).
Ratings do not constitute a recommendation to buy or sell, but only one of the factors to be weighted by investors.
Throughout the entire period during which ratings are valid, ARC Ratings monitors the issuer’s performance on a constant basis, and
may even bring forward the date of the follow-up. Hence, prior to an investor using a rating, ARC Ratings recommends that it be
confirmed, namely by consulting the listing of public ratings available at the web site www.arcratings.com.
Ratings are assigned based on information, including confidential information, collected from a wide group of sources, and in
particular from the entity whose financial commitments are subject to rating. ARC Ratings uses and treats this information with due
care and attention. Although all due care was taken in the collection, cross-checking and processing of the information for the
purposes of the rating analysis, ARC Ratings cannot be held liable for its truthfulness. ARC Ratings must make sure that the information
has a minimum level of quality prior to assigning a rating based on such information.
In the rating process, ARC Ratings adopts procedures and methodologies aimed at ensuring transparency, credibility and
independence, and also that rating classifications are not influenced by situations of conflict of interests. Any exceptions to these
principles are disclosed by ARC Ratings together with the rating classification of the financial commitment in question.
ARC Ratings, S.A.
18/19
Kingdom of Spain
Sovereign Rating Report
Issuer Rating
Foreign Currency
BBB+
BBB+
Local Currency
Medium and Long Term
(BBB+, with stable outlook)
BBB+
Short Term
(A-2)
A-2
A-2
Country Ceiling
Foreign Currency
Short Term
(A-2)
Local Currency
Medium and Long Term
(AA+)
AA+
Medium and Long
Lon g Term
(BBB+, with stable outlook)
AA+
Medium and Long Term
(AA+)
All Ratings assigned are unsolicited
Period of Analysis
Methodology
ARC Ratings Sovereigns’ Rating Methodology
(www.arcratings.com)
2008 to 2017
Rating Panel
Analysis Team
Emma-Jane Fulcher
Chief Ratings Officer
Joan Feldbaum-Vidra
Head of Sovereigns
Joan Feldbaum-Vidra
Head of Sovereigns
Carlos Leitão
Analyst
Quah Boon Huat
MARC
Senior Economist
Madan Sabnavis
CARE Ratings
Chief Economist
Next FollowFollow- ups
11 December 2015
ARC Ratings, S.A.
180 Piccadilly
London W1J 9HF
UNITED KINGDOM
Phone:
+44 (0) 2032 827594
E-mail:
[email protected]
Site:
www.arcratings.com
ARC Ratings, S.A. is registered as a Credit Rating Agency (CRA) by the European Securities and Markets Authority
(ESMA), within the scope of the REGULATION (EC) Nº 1060/2009 OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL, of 16 September, and recognised as External Credit Assessment Institution (ECAI) for Corporates by the
Bank of Portugal.
ARC Ratings, S.A.
19