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Spain Kingdom Of

Spain Kingdom Of

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Published by: plangintzaestrategikoa on Mar 24, 2011
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Spain (Kingdom of)
Primary Credit Analyst:
Marko Mrsnik, Madrid +34 913 896 953; marko_mrsnik@standardandpoors.com
Secondary Contact:
Frank Gill, London (44) 20-7176-7129; frank_gill@standardandpoors.com
Table Of Contents
March 22, 2011
855689 | 300989331
Spain (Kingdom of)
Major Rating Factors
Wealthy, relatively diversified economy with stable political system
Accelerated pace of structural reform and restoration of public financediscipline
Fiscal flexibility underpinned by moderate, albeit rising, general governmentdebt
Sovereign Credit Rating
Weak economic growth prospects due to ongoing private-sector deleveraging and relative deterioration in exportcompetitiveness
High unemployment and labor market rigidities, which we expect will be addressed via ongoing reforms
Significant net external debt level, implying private sector vulnerability to a deterioration in external financingconditions
The ratings on Spain reflect the benefits of what we view as a modern and relatively diversified economy, as well asour opinion of the government's continuing political resolve to deal with the outstanding challenges, as reflected in asignificant acceleration in both budgetary consolidation and the structural reform effort since 2010. Moreover,Spain benefits, in our opinion, from its moderate (albeit increasing) general government debt. Nevertheless, webelieve that the ratings will remain under pressure from what we deem to be high private-sector indebtedness,challenges to the economy's competitiveness, persistently difficult labor market conditions, and the economy's weaknet external financial position.Following the 0.1% contraction in GDP we estimate for 2010, we anticipate that the economy will return to positivegrowth rates of approximately 0.7% in 2011 and 1.5% in 2012. This recovery, in our opinion, is subject tosignificant downside risk due to a combination of: the private sector's continuous deleveraging; what we consider tobe restrictive fiscal policies; limited growth prospects, in our opinion, on the back of the global economic recovery;persistently high unemployment; financial-sector stress; and large net external debt (we forecast a level equivalent to78% of GDP in 2011). We believe that these factors make the economy vulnerable to sudden shifts in externalfinancing conditions, possibly complicating the country's economic recovery.In an unfavorable economic climate in 2010, the government put in place what we view as a substantial reformeffort, including a front-loaded budgetary consolidation strategy and a comprehensive set of structural reforms. Weestimate that the 2010 general government deficit target of 9.3% of GDP was met, on the back of the government'sfiscal package involving tax hikes and spending cuts. This is mainly due to the significantly better-than-expectedcentral government deficit (5.1% of GDP versus a planned 5.9%), more than compensating for the slippage at thelocal and regional government level. We anticipate that the general government deficit will decline to 6.3% of GDPin 2011, broadly in line with the government's target of 6.0%, and to 5.1% of GDP in 2012. The differencebetween our 2011 forecast and that of the government is attributable to our lower forecast of underlying economic
Standard & Poor’s
| RatingsDirect on the Global Credit Portal |
March 22, 2011
855689 | 300989331
growth, and its impact on the budget.As a result, we forecast an increase in net government debt to 61.6% of GDP in 2011 and 65.0% in 2012, from anestimated 56.2% in 2010. Further growth in borrowing costs could result in higher interest outlays than thegovernment currently plans, although the increase in the average interest rate on Spain's outstanding governmentdebt in 2010 was negligible (3.69%, versus 3.53% in 2009 and 4.32% in 2008)--despite negative marketsentiment--thus limiting the potential additional burden on the budget. Our current government debt projection doesnot include the anticipated income from the announced partial privatization of the airport operator AENA and theNational Lottery. Similarly, it does not include potential additional capital injections by the state to furtherstrengthen the financial sector. In our opinion, such costs could surpass €20 billion--a level recently mentioned bythe government--with the excess driven either by higher-than-expected losses in financial institutions'property-related loan portfolios; failure of financial-sector entities involved in integration processes to reduce theiroperating expenses; or higher funding costs, since, in our opinion, the financial sector's approximate €760 billion of gross external debt at year-end 2010 leaves it vulnerable to exogenous shocks.We believe that in the medium to long term, the recently adopted pension reform program, if fully implemented, willlikely lead to important savings in social security outlays. The reform program includes increases in the retirementage--to 67 for standard retirement and 63 for early retirement--an extension of the pension calculation period to 25years from 15, and the introduction of a "sustainability factor" linking the financial sustainability of the pensionsystem to the future evolution of life expectancy. While it is too early, in our view, to assess the impact of laborreform on Spain's economic growth prospects, we believe that the reform measures implemented to date are a stepin the right direction, though stopping short of a fundamental overhaul of the labor market. Additional labor reformmeasures planned by the government for the first quarter of 2011 in the areas of active market policies andcollective bargaining procedures could, however, further reduce some of the structural rigidities that we believeconstrain labor demand in the economy.
The negative outlook reflects the possibility of a downgrade if Spain's fiscal position deviates materially, in ouropinion, from the government's budgetary targets for 2011 and 2012. A downgrade could also occur if theimpending correction in private-sector leverage results in what we would consider to be a disorderly adjustment inthe financial sector, leading to a sharper deterioration of the Spanish government's balance sheet or lower economicgrowth than we currently anticipate, possibly coupled with resurging deflationary pressures. Moreover, we couldlower the rating if vulnerabilities persist related to external financing conditions or delays in the implementation of structural reforms.Conversely, we could revise the outlook to stable if the government meets or exceeds its budgetary objectives in2011 and 2012, risks to external financing conditions subside, and Spain's economic growth prospects prove to bemore buoyant than we currently envisage as a result of a smooth economic adjustment and restructuring process.
Table 1
Kingdom of Spain - Selected Indicators
2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014fMedianAA
GDP per capita ($) 24,660 26,260 28,219 32,423 35,197 31,949 30,548 32,150 31,366 31,964 32,572 45,742
855689 | 300989331
Spain (Kingdom of)

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