Moody's warns of the negative effect on Spain's rating of the agreements for Sánchez's investiture

MADRID, 17 Nov.

Moody's warns of the negative effect on Spain's rating of the agreements for Sánchez's investiture


The credit rating agency Moody's has warned that the implementation of the political agreements to achieve the investiture as president of the Government of Pedro Sánchez are negative for Spain's credit profile "due to the greater political risk", although they are positive for the autonomous communities. , especially Catalonia, mainly thanks to the partial cancellation of the debt.

Moody's stresses that the final credit implications will depend on how the agreements are implemented and the ability of the government coalition to carry out its broader political agenda, which the agency expects to be stable, despite the tightness of her majority exposes her to a change in political sentiment if any of the parties withdraw their support, although she is confident that "all parties in the coalition will support Spain's next budget for 2024."

"For the sovereign (issuer), the agreements pose political risk," say Moody's analysts, pointing out the tensions registered and the deepening of political fragmentation within Spanish society.

Likewise, although they consider that the cancellation of the debt would have no effect on sovereign debt indicators, they point out that it would raise "moral hazard problems", which could discourage the formulation of prudent fiscal policies at the regional level, putting pressure on the country's finances. sovereign issuer.

In this regard, the agency suggests that a new fiscal framework that grants Catalonia and other regions more autonomy in terms of income and expenses could mitigate this risk, depending on its design.

Regarding the effect on regional and local governments, Moody's expects that the agreements will benefit the credit quality of the Generalitat de Catalunya and potentially other Spanish regions by easing their debt burden and reducing their interest expenses.

In this sense, it points out that the new framework would allow Catalonia to collect 100% of the taxes paid within its territory, increasing its financial autonomy, while it is contemplated to forgive 15,000 million euros of the debt of the Catalan Generalitat, which was contracted through the liquidity mechanism of the Autonomous Liquidity Fund (FLA), around 20% of the debt of the Generalitat granted by the central Government through the instrument.

The partial debt cancellation could be extended to other regions, with the aim of compensating them for excess debt related to the negative economic cycle, while in the case of regions with limited or no debt contracted with the central Government, including the Country Basque, Navarra and Madrid, the funds would help reduce their overall debt levels.

"According to our calculations and considering a similar approach for other regions, a forgiveness of 20% of regional debt incurred through central government liquidity mechanisms, combined with additional transfers to regions that have not used these mechanisms, would total around of 45 billion euros, or approximately 3.3% of the national GDP," the agency estimates.

As a result of such forgiveness, Moody's estimates that the debt burden of the rated regions would drop from 180% of operating income in 2022 to an average of 154% and estimates that they would achieve annual interest savings of approximately €407 million on average. , reducing your operating expenses and improving your operating performance in the future.

"The Generalitat of Catalonia would benefit the most because it is the most indebted region in Spain," says Moody's, noting that the proposed measures would reduce its debt burden to approximately 203% of operating income from 245% at the end of 2022. which would still be high compared to other European regional and local governments.