Moody's downgrades Catalonia's long-term rating

Catalonia and five other autonomous communities have had their long term rating downgraded whilst the Spanish state's credit rating comes under review.

Caitlin Smith

July 29, 2011 08:02 PM

Barcelona- (CNA). - Moody's Investors Service, an international rating gency, has today downgraded Catalonia's long-term rating due to the "deterioration in their fiscal and debt positions". The country, along with Castilla-La Mancha, Murcia and Valencia, has been downgraded by one level reflecting the common problem of reducing the deficit. Although this development is not unexpected, it is likely to deter some investors if the financial situation fails to dramatically improve.

The Global Credit Research group has said that, "the downgrade of Catalonia to Baa1 (from A3) is based on Moody's expectation that the region will record particularly poor fiscal performance in 2011, deviating widely from the deficit limit for the year".

The negative outlook of Moody's, particularly when it comes to devolved economic spending was highlighted in their Special Report, "Spanish Regions: Continued Fiscal Slippage Would Have Negative Ratings Impact", which was published at the end of last month. The downgrading of Catalonia reflects the caution with which the organisation views regional financial plans, which have been criticised for being neither effective nor swift.

Although it has been recognised that Catalonia's deficit for 2011 is expected to be 1.2% lower than in 2010, the organisation believe that this was achieved "by one-time reductions in capital expenditures rather than a narrowing of its ongoing operating deficit" making it "unsustainable in the long run".

Moody's believe that the country remains vulnerable to market disruptions given their large funding requirements and warned that Catalonia would face an increasingly negative rating if it did not make "credible commitments towards sustainable improvements in its fiscal position".

Catalan President Artur Mas, who has been working to introduce 10% cuts in spending, criticized the recent role of rating agencies in the crisis. According to Mas, they are at times “too harsh” with governments including the Catalan government, despite their own failings at the beginning of the financial crisis for not properly predicting the fall-out of big banks such as Lehman Brothers.

Catalan politicians consider their treatment by ratings agencies and some members of the international press to be “unfair". According to the politicians, Catalonia is the only autonomous community in Spain introducing sizable spending cuts yet it is usually considered badly abroad. The “Col·lectiu Emma”, a Catalan lobby, said that “on the matter of the regions' responsibility, one should be careful not to lump together those whose productive base can allow them to overcome the crisis and those whose future will depend to a large extent on government handouts. Or those that are already taking some painful measures and those that this late in the game haven't yet started on a serious program of financial restraint for the coming period”

Spanish debt rating

It is also believed that the Spanish State's bond rating will also be downgraded within the next three months by one degree from Aa2 to Aa3. Despite short term improvements being made with regards to fiscal targets, the long term economic growth of the State is still at risk with doubts being raised about the capacity of the Spain to repay its debts.

Although the Spanish debt isn’t as big as in Greece, the second Greek rescue package last week only drew attention to debt concerns across Europe. Moody's explained that the focus on Spain was directly triggered by the participation of private bond holders within the second bail-out deal, which "signalled a clear shift in risk for bondholders of countries with high debt burdens or large budget deficits".

Moody's are further considering reducing the credit rating of 5 major Spanish banks including Banco Santander and Banco Bilbao Vizcaya Argentaria (BBVA).