This comes via Win Thin at Brown Brothers Harriman:
Fitch downgraded Spain to AA+ from AAA and inexplicably with a stable outlook. Stable? Spain should be downgraded multiple notches. This comes a few weeks after S&P downgraded Spain one notch to AA from AA+ and kept a negative outlook. Spain so far has got off relatively easy. However, Spain remains way out of line with our own model, which puts Spain at A/A2/A vs. actual ratings of AA/Aaa/AA. Believe it or not, Moody’s still has Spain as a triple-A credit. We don’t think that can last, and we stress again that we see multiple downgrades ahead for Spain. Indeed, Spain is the 800 pound gorilla in the room. Greece and Portugal are small countries, but Spain is about five times their size with regards to GDP.
The euro is of course taking it on the chin and has given up all of today’s gains and is flirting with 1.23 level. We commend the ratings agencies in general for the impeccable timing of their announcements, coming today in holiday-thinned conditions as both US and UK shut down ahead of Monday holidays. In general, this should serve as a reminder that while the news stream out of Europe was generally quiet this week, the potential and risk is for more bad news to emerge from time to time and roil markets. Spain is coming increasingly into the crosshairs due to negative developments in its banking system, and the lines of contagion from Greece are growing.
Markets have sold off significantly on the news. Spain has aggregate government debt levels significantly lower than even Germany (see chart below). Yet Spain has a worsening economic outlook and the Spanish banks have now come into the spotlight as a potential source of socialized losses.
The Banco de España is trying to get the problem with Spanish savings banks (cajas) under control. I have reported on a few of these mergers in the past links posts. The most prominent recent merger stories are the following (all links in Spanish):
- La Caixa negocia la absorción de Caixa Girona – ABC.es
- Las cajas de Ávila y Segovia votan «no» a su integración en Banca Cívica – ABC.es
- Cajastur, CAM, Caja Cantabria y Caja Extremadura ratifican su fusión – ABC.es
- CajaMurcia coge el testigo y negocia otra macrofusión de cajas de ahorros – ABC.es
- Principales fusiones de cajas de ahorro desde 1991 – ABC.es
Below is a presentation from the Banco de España outlining its position on the health of Spanish banking. See Spain-related links in my news feed here. This is a very important piece of information given the worries about Spain (hat tip Zero Hedge).