You are here: Economy » More Color on Spain, the Cajas and Moody’s Downgrade
By Marc Chandler
The market continues to digest the meaning and implications of Moody’s decision to cut Spain’s rating to Aa2 from Aa1. The two main considerations behind Moody’s decision is that the cost to restructure the banks will be greater than Spanish officials have estimated and the sustainability of current austerity measures.
At 40-50 bln euros, Moody’s new estimate is more than twice the estimate it had made late last year and is well above the government’s estimate. Moody’s downgrade of FROB, which is the government arm that is to help raise the funds for the bank restructuring. The ECB was quick to point out that FROB has the capacity to provide as much as 90 bln euro in funding. What was not said was that like the EFSF, FROB is not pre-financed. That as banks request funds, it needs to raise them by issuing bonds and will then in some ways compete with the government in the capital market.
Ambitious fiscal targets are being met, but Moody’s concerns are two-fold. First that the measures tend to rely on cuts in capital spending and wage freezes, both of which by definition are not sustainable. Second, Spanish regional governments enjoy a high degree of autonomy and fiscal discipline has been more elusive. A little than half the 17 autonomous regions overshot their fiscal targets last year.
To be sure, Moody’s continues to suggest that Spain will not have to tap into the EFSF. Just like Irish per capita GDP remains above Germany, Spain’s debt/GDP ratio last year was lower than Germany (and France and the UK) and if Moody’s figures are close to the reality, Spain will still have a lower debt/GDP than Germany this year.
Later today Spain’s central bank is expected to provide a more detailed accounting of the bank/cajas recap needs.
About Marc Chandler
Marc Chandler joined Brown Brothers Harriman in October 2005 as the global head of currency strategy. Previously he was the chief currency strategist for HSBC Bank USA and Mellon Bank. In addition to frequently providing insight into the developments of the day to newspapers and news wires, Chandler's essays have been published in the Financial Times, Barron's, Euromoney, Corporate Finance, and Foreign Affairs. Marc appears often on business television and is a regular guest on CNBC and writes a blog called Marc to Market. Follow him on twitter.
Like us on Facebook
Follow Edward on Twitter
- When do we decide that Europe must restructure much of its debt?
- How to look at the Greece bailout deal
- Negotiating strategies and political constraints regarding Greece
- A decision-tree framework for thinking about the Greek – Troika negotiations
- Tax Anticipation Notes: A Timely Alternative Financing Instrument for Greece
- Syriza and the French indemnity of 1871-73
- Gauging the financial crisis end game
- Why quantitative easing and negative interest rates will fail
- Pie in the Sky
- Yanis Varoufakis on fiscal waterboarding and Ponzi austerity
- The convergence of safe asset yields toward zero
- Interview on Chinese CPI and PPI data for December
- Russia, Oil, China and the Dollar
- A Brave New World
- My reading of the FT on China’s “turning away from the dollar”
- How might a China slowdown affect the world?
- Consumption taxes, inflation and low wage growth in Japan lead to recession
- Central banks, inflation, currency wars and the Japanese experiment
- Banks, Japanese trade, the currency wars and deflation
- Abenomics 2.0 – Just What Are They Trying To Achieve?
-  On Net Neutrality and ‘the arrogance of the Federal Reserve’
-  US port strikes continue and Paul Craig Roberts on Greece
-  Marc Faber: Is gold making a return in the new year?
-  Greece is the perfect example of debt deflation
- Marshall Auerback on Greece and Japan
-  Galbraith, Magnus: Greece cannot pay debts, Europe ad hoc + dysfunctional
- Warren Mosler on Greece
-  Schiff on US market risk and Magnus on EM corporate debt
- Marc Faber on tail risk, China, and oil
-  Brynjolfsson and Brodsky on tail risk and financial repression