(The following statement was released by the rating agency)
Sept 13 - Fitch Ratings has placed the Autonomous Community of Catalonia’s ‘BBB-’ Long-term foreign and local currency ratings on Rating Watch Negative (RWN). Fitch has also placed the Short-term rating of ‘F3’ and the respective bond issues/senior unsecured ratings on RWN.
The rating actions reflect the uncertainty surrounding the timely availability of funding through the Fondo de Liquidez Autonomico (Regional Liquidity Fund, FLA). The FLA was created on 14 July 2012, but has not yet been made available to the regions. Fitch considers that until the fund is formalised and in place, the regions’ liquidity positions are under pressure. Catalonia is the only region rated by Fitch that has so far officially requested to tap the fund. It has requested an initial amount of EUR5,023m to cover debt repayments and the 2012 deficit. However, this amount is subject to further discussions with the Ministry. According to Catalonia’s Economic and Financial Plan, debt repayments for Q412 amount to EUR4,795m.
Fitch will resolve the RWN once the agency has obtained additional information about the timing of the implementation of the FLA. If the creation of the fund is likely to be protracted and thereby hinder the access to liquidity for the regions, Catalonia could be downgraded to below investment level. A downgrade could also take place if Catalonia decides not to proceed with accessing the FLA and the region does not present an alternative long-term funding option.
Catalonia has stated that if the FLA is not in place by the end of the month it will request a bridge loan from the central government in order to cover its short term needs as it has practically been cut off from market access to funding. Nevertheless, Fitch believes that there is still uncertainty as to whether this loan will be granted and if this is the case, believes that at present, the region does not have any viable alternatives to cover its funding needs.
Catalonia’s ratings are underpinned by the strong implicit and explicit support of the state as articulated through policy statements and recently introduced mechanisms. These include the FLA and tighter monitoring of the regions’ fiscal position, with central government having the right to directly intervene if any region deviates from agreed deficit targets. Fitch rates Spain ‘BBB’ with a Negative Outlook.
The FLA was established for an initial EUR18bn with the aim of enabling the regions to tap central government liquidity for refinancing maturing obligations and deficit funding. Of the EUR18bn, EUR8bn will be provided through five Spanish banks, and EUR6bn through Loterias y Apuestas del Estado, the Spanish state-owned lottery games operator. The fund is an example of the strong support by Spain’s central government for its regions as they face unprecedented liquidity challenges. The fiscal situation of the regions is extremely challenging, with a real risk that deficit targets for the autonomous communities in 2012 may be exceeded. On 13 September, the Stability Law that establishes Budgetary Stability for the regions will be amended and reformed in order to permit the FLA to operate. However, the FLA is only a temporary solution to the Spanish regions’ liquidity constraints, driven by sharp rises in debt and the closure of the capital markets.