Fitch Downgrades Spain, Risks Remain Ahead (EWP, STD, BBVA)

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Fitch Ratings has had many reports today, but perhaps the largest call is a downgrade of Spain to “BBB” that has added some pressure to the Euro. Today’s downgrade took Spain’s Long-term foreign and local currency Issuer Default Ratings down to ‘BBB’ from ‘A’. The Short-term rating has also been downgraded to ‘F2′ from ‘F1′. The Outlook on the Long-term IDRs is Negative. Fitch has simultaneously affirmed the common Euro Area Country Ceiling for Spain at ‘AAA’.

The news is now really hurting Spanish securities trading in New York.  iShares MSCI Spain Index (AMEX: EWP) is down only $0.04 at $23.03. Banco Santander, S.A. (NYSE: STD) is actually up 1% at $5.99 and Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) is up 0.6% at $6.39. It is interesting that this was a 3-notch downgrade.

Some of the factors are the obvious and others are more specific.  The likely fiscal cost of restructuring and recapitalising the Spanish banking sector is now being put at around 60 billion Euros, or 6% of GDP, according to Fitch.  That cost could go as high as 100 billion Euros in a more severe stress scenario.  The previous baseline from Fitch was only $30 billion or 3% of GDP.

Gross general government debt is now projected to peak at 95% of GDP in 2015 under the new baseline bank recapitalization.  Fitch also forecasts that Spain will remain in recession through the remainder of this year and 2013 rather than having a mild recovery in 2013. A high level of foreign indebtedness has made Spain vulnerable to contagion from the ongoing crisis in Greece.

Again, we keep saying this and we will continue to keep saying it… THIS IS NOT THE LAST DOWNGRADE IN EUROPEAN PIIGS.

JON C. OGG

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