The key drivers of today’s change in outlook are as follows:
1) The evidence of a sustained rebalancing of the Spanish economy and improving medium-term economic prospects, which supports Moody’s view that Spain’s public finances are on a slowly improving trend. The external accounts continue to improve, the situation on the labour market has stabilized and the private non-financial sector continues to deleverage. Moody’s expects moderate but positive growth from 2014 onward.
2) The material decrease in market access risks for the Spanish sovereign and the lower risk of contagion from negative events elsewhere in the euro area than at the time of Moody’s last rating action in October 2012. This is reflected in the Spanish Treasury’s relative ease in securing sizeable amounts of market funding at significantly lower interest rates than in 2012.
3) The significant reduction in contingent liabilities for the sovereign emanating from the Spanish banking sector over the past year. Following several rounds of capital injections and the transfer of real-estate assets to the so-called bad bank Sareb, Moody’s now believes that any further potential recapitalization needs of the Spanish banking system would be limited in size and would be unlikely to derail the slowly improving trend in the country’s public finances.
Concurrently, Moody’s has today also changed the rating outlook to stable from negative on the Baa3/P-3 ratings of the Fondo de Reestructuración Ordenada Bancaria (FROB), while also affirming the ratings. The FROB’s bond issues benefit from an irrevocable and unconditional guarantee from the Kingdom of Spain. Spain’s country ceilings of A3 are unaffected by today’s rating action.
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