Spain downgraded by Moody's and placed on negative credit watch due to the recapitalization rates of the cajas which could reach 120 BB Euros

Spain gets downgraded as Moody's realizes that the current situation with the Cajas (savings banks) is going to be very difficult to actually accomplish.  Spanish government recently required the cajas to be recapitalized with core capital up to 10%.   Too bad they didn't think about the bill which was estimated by Moody's that it could take another 120 BB Euros infused into those banks. Don't get me wrong, they need to be recapitalized.  I just don't think that the private sector is going to be willing to invest when everyone knows that the Spanish government will bail them out if they don't. 

Moody's downgraded them one notch from Aa2 to Aa1.  In reality it could have been worse.   They were also placed on negative watch.  The reasons for the downgrade below.  Via Moody's:

(1) Moody's expectation that the eventual cost of bank restructuring will exceed the government's current assumptions, leading to a further increase in the public debt ratio.
In particular, they laid out the cajas financing needs which, "in a more stressed scenario, recapitalization needs could increase to approximately €110-120 billion".
(2) Moody's continued concerns over the ability of the Spanish government to achieve the required sustainable and structural improvement in general government finances, given the limits of central government control over the regional governments' finances as well as the background of only moderate economic growth in the short to medium term.

The decision to assign a negative outlook to the rating reflects Moody's view that the risks to Spain's government finances remain skewed to the downside. Spain's vulnerability to market disruption remains elevated given the high funding requirements, not only for the sovereign but also for the regional governments and the banks.
But on the other hand Moody's did reaffirm what we have been saying here is that Spain will not seek a bailout because they still have time to get their debt monster under control, unlike Portugal. 
Moody's continues to believe that Spain's debt sustainability is not under threat, and its baseline assumptions do not anticipate a need for the Spanish government to ask for EFSF liquidity support. However, Spain's substantial funding requirements -- not only those of the sovereign, but also those of the regional governments and the banks -- make the country susceptible to further episodes of funding stress.


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