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Catalonia Cut to Junk as Spain Bails Out Bankia, Deficit Swells

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Catalonia Cut to Junk as Spain Bails Out Bankia, Deficit Swells
Standard & Poor's lowered Catalonia by two grades to BB from BBB- with a negative outlook. Photographer: Lourdes Segade/Bloomberg

Sept. 1 (Bloomberg) -- Catalonia’s credit rating was cut to junk by Standard & Poor’s after Spain’s most indebted region said it needs to tap a national rescue fund, even as the central government said its budget deficit swelled to 48.5 billion euros ($61 billion) in the year through July.

The cash-strapped national government in Madrid also moved late yesterday to inject capital into the Bankia group “immediately” after the nationalized lender posted a 4.45 billion-euro first-half loss.

Investors are shunning Spanish securities on concern that the euro area’s fourth-biggest economy may lose access to funding as it struggles to tame the euro region’s third-largest budget deficit amid a deepening recession. Moody’s Investors Service said Aug. 30 it may downgrade Spain’s rating to junk should the government seek further international aid.

“The problem is that time goes by, but there is no improvement; the government keeps talking in half-truths,” said Jose Antonio Herce, a public administration consultant in Madrid with Analistas Financieros Internacionales. “The deficit data is the most serious, because we are more than half way through the year, dangerously close to the limit for the full year, and there’s no saying how it can get better.”

The central government’s budget deficit surged to 4.6 percent of gross domestic product in the first seven months compared with 3.6 percent a year earlier, according to the Budget Ministry. Spending rose 21 percent on transfers of funds to the regions and higher interest payments to refinance debt. Meanwhile, tax receipts fell 1 percent.

Fourth Bailout

Even so, Deputy Budget Minister Marta Fernandez Curras denied the country may miss its overall 2012 deficit target of 6.3 percent of GDP for the regions, more than 8,000 municipalities and the welfare system as well as the central government. Adjustments haven’t yet produced their full impact and the regions are taking further austerity steps, she said.

S&P lowered Catalonia by two levels to BB from BBB- with a negative outlook after it requested its fourth bailout from the central government this year on Aug. 28. The region already had a non-investment grade with Moody’s Investors Service and is one level above junk with Fitch Ratings.

The rating company cited “nascent tensions between the region and the central government, and the potential negative impact we believe these tensions may have on Catalonia’s ability to secure external funding.”

Deficit Target

Valencia, Murcia and Catalonia have claimed more than half of 18 billion euros of emergency loans announced in July by the government to help the regions face bond redemptions in the second half. The government had also organized 23 billion euros of loans for the regions in the first half.

The country’s regions may cause Spain to miss its budget deficit target again this year. They were responsible last year for most of Spain’s overspending, which remained nearly unchanged from 2010 at 8.9 percent of gross domestic product.

Prime Minister Mariano Rajoy insists Spain won’t seek a second sovereign bailout until European leaders make aid conditions clear. Spain locked in as much as 100 billion euros in international aid for banks last month. The yield on Spain’s 10-year benchmark bond rose 26 basis points at 7:32 p.m. in Madrid yesterday, widening the gap with similar German maturities to 5.52 percentage points.

Spain’s bank rescue fund, known as FROB, will provide capital to Bankia while the lender completes a restructuring plan, FROB said yesterday in a statement. The capital is an “advance” on money Bankia is due to receive once its reorganization plan is completed in October and approved by European authorities in November, FROB said.

Asset Base

The FROB will pump from 4 billion euros to 5 billion euros into Spain’s third-biggest lender in the next two weeks, said a person familiar with the situation who asked not to be identified because those details aren’t public.

The yield on Spain’s 10-year benchmark bond has held above 6 percent since Bankia, with an asset base almost a third the size of the country’s economy, was taken over by the state, focusing investors on the costs of fixing Spanish lenders. Bankia’s plea for a bailout pushed Spain toward requesting a rescue for its banking system. It reported a first-half loss today after booking asset impairment charges of 6.63 billion euros.

To contact the reporter on this story: Angeline Benoit in Madrid at

To contact the editor responsible for this story: James Hertling at

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