Moody’s Downgrades 5 Spanish Regions As GDP Estimates Lowered

Moody’s Corporation (NYSE:MCO) downgraded 5 Spanish regions (Catalonia, Extremadura, Andalucia, Castilla La-Mancha, and Murcia) to below investment grade, and the government notified the EC that its 2012 budget shortfall would be 7.3% of GDP, up from a projected 6.3%. Over EUR 17 bln of the EUR 18 bln regional bailout fund is already claimed. Spain has agreed on haircuts that their so-called bad bank will apply to real estate assets that it buys (54% for new homes and 48% for existing homes/land).  Then the Bank of Spain released Q3 GDP estimates showing a  0.4% contraction, versus of 0.7%. Spanish 10-yr government bond yields moved up to 5.577%, from as low as 5.485%.

Moody's Downgrades 5 Spanish Regions As GDP Estimates Lowered

The Spanish newspaper, El Confidencial, reports that a document seen by the newspaper and directed to the EU Commission shows the Spanish government has acknowledged the 2012 deficit will end up at 7.3% of GDP – well ahead of the current official target of 6.3%.

The positive performance on the credit markets has continued over the past two weeks. High-yields were up again. The most important driver of peripheral corporate bonds was the announcement of Moody’s Corporation (NYSE:MCO) to leave the investment grade country rating of Spain unchanged. As a result, the average CDS (credit default swaps) of Spanish companies have narrowed by 30bps to 230bps.

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The expectations of investors that Spain might request a credit line from ESM, as a precaution, has also kept the credit markets in positive terrain. This credit line would allow the ECB to go ahead with bond purchases. As an (positive) upshot of a pre-emptive credit line, the yields and refinancing costs for Spain on the bond market would fall.

The EU summit did not result in any decisions that would likely move the markets either way. The heads of state and
governments of the EU agreed on a banking supervisor to be set up gradually from 2013 onward. In addition, Greece would be granted further support on the condition that it was going to continue its reforms. However, the release of the credit tranche of EUR 31bn still hinges on the Troika report, which is due shortly.

President Hollande said, after talks with Irish Prime Minister Kenny on Monday, that he was in favor of retroactive recapitalization of Ireland’s banks, adding that the Irish banking sector should be treated as “a special case”.


Yesterday, the EU Parliament’s Economics Committee rejected Luxembourg CB Governor Mersch’s suitability to serve on the ECB’s Executive Board, because of gender inequality. The committee complained that if Mersch were appointed, the 6-person ECB Executive Board would be without a female member for the next six years.