Spain Joins Credit Rating Negativity (BBV, STD, REP, TEF, SNF, EWP)

Monday and Tuesday came the downgrades for Greece by ratings agencies.  Now it is Spain’s turn, or at least the writing is on the wall.  Standard & Poor’s has revised Spain’s outlook to “Negative,” although its ratings have been affirmed and this does not signal an imminent ratings cut on the sovereign debt.  S&P noted, “We are revising the outlook on the Kingdom of Spain to negative from stable, and affirming the ‘AA+’ long-term and ‘A-1+’ short-term sovereign credit ratings.” On this caution, we are watching several key Spanish ADRs that trade in the U.S. and a closed-end fund and an ETF.

The stocks are Banco Bilbao Vizcaya Argentaria SA (NYSE: BBV) and Banco Santander SA (NYSE: STD) as the two big Spanish banks; and watching REPSOL YPF SA (NYSE: REP) in oil and gas and Telefonica SA (NYSE: TEF) in telecom.  There is also a closed-end fund and an ETF: Spain Fund Inc. (NYSE: SNF), with very thin volume and only a market cap of $67 million; and iShares MSCI Spain Index (NYSE: EWP).

The ratings agency said that compared to the expectations when it lowered Spain’s sovereign ratings in January 2009, S&P now believes that Spain will see a more pronounced and persistent deterioration in its public finances.  S&P further cautioned that longer period of economic weakness versus peers is likely.  The outlook also reflects a belief that reducing Spain’s “sizable fiscal and economic imbalances” will require strong policy actions and those actions have not yet materialized.

Spain’s economy went through much of the same property bubble explosion that was seen in California and throughout the Southwestern U.S. with creative mortgages and a land rush mentality.  There is also a very high private sector indebtedness of 177% of GDP in 2009 and what is called an inflexible labor market.

As a reminder, this is different than what we saw in Greece.  Today’s action is an outlook rather than a formal cut, but this is the prelude to further downgrade actions and it is frequent that an action from one ratings agency triggers actions from others.  S&P said that this outlook reflects a downgrade risk within the next two years.

Jon C. Ogg
December 9, 2009