Moody's May Cut Spain's Aa1 Credit Rating on Funding Requirements
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Continuing worries over rising borrowing costs, potential losses in its banking system and regional deficits may cause Moody's Investors Service to cut Spain's Aa1 credit rating.
“Spain’s substantial funding requirements, not only for the sovereign but also for the regional governments and the banks, make the country susceptible to further episodes of funding stress,” Moody's analyst Kathrin Muehlbronner said.
Moody's said that Spanish banks may need an additional 90 billion euros ($120 billion) in capital, an estimate that is based on lenders needing a tier 1 capital ratio of as much as 12 percent to tap funding.
“Given the situation after Ireland where the banks will have to be recapitalized to a much higher capital level, to a core Tier 1 ratio of 12 percent, we ran stress tests to see what that would mean in the context of Spain, if Spanish banks had to
be recapitalized to a higher level in order to retain market confidence,” Muehlbronner said.
Under the ratings agencies base scenario, it expects Spain to need recapitalization of 25 billion euros to retain a Tier 1 ration of 8 percent.
The announcement of the possible credit rating cut comes just a day before the final bond sale of the year for Spain. The euro dropped to $1.3315 on the news. The news ended a seven-day rally in the European markets on Wednesday.
“Spain’s substantial funding requirements, not only for the sovereign but also for the regional governments and the banks, make the country susceptible to further episodes of funding stress,” Moody's analyst Kathrin Muehlbronner said.
Moody's said that Spanish banks may need an additional 90 billion euros ($120 billion) in capital, an estimate that is based on lenders needing a tier 1 capital ratio of as much as 12 percent to tap funding.
“Given the situation after Ireland where the banks will have to be recapitalized to a much higher capital level, to a core Tier 1 ratio of 12 percent, we ran stress tests to see what that would mean in the context of Spain, if Spanish banks had to
be recapitalized to a higher level in order to retain market confidence,” Muehlbronner said.
Under the ratings agencies base scenario, it expects Spain to need recapitalization of 25 billion euros to retain a Tier 1 ration of 8 percent.
The announcement of the possible credit rating cut comes just a day before the final bond sale of the year for Spain. The euro dropped to $1.3315 on the news. The news ended a seven-day rally in the European markets on Wednesday.
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