FRANKFURT (MNI) – Following is the full text of the statement
issued by Moody’s rating agency late Thursday on Spain’s long-term
sovereign debt rating:

“The Baa3 long term debt rating of the Spanish government remains
on review for possible downgrade. The review commenced on 13 June 2012
and will likely continue through the end of September because of pending
information on:

(1) the scope of the bank recapitalisation needs;

(2) the nature and size of support mechanisms available under the
European Stability Mechanism (ESM) in light the upcoming German
Constitutional court ruling; and

(3) potential changes and additions to the existing
crisis-management framework as policymakers reconvene in the next few
weeks to discuss policy options in a number of areas, including the
further advancement of a banking union.

At the same time, Moody’s cannot exclude the need for more
immediate action if Spain’s ability to refinance maturing debt was to
deteriorate sharply, prompting the country to seek external support
beyond the recapitalisation programme. While full support under these
market conditions would alleviate the risk of a default in the short
term, Moody’s believes that medium-term risks to bondholders would
increase in such a scenario.

RATIONALE FOR CONTINUING THE REVIEW

-SCOPE OF BANK RECAPITALISATION NEEDS-

As noted in the 13 June rating announcement, the first key driver
of the review is the size and terms of the banking support package,
including the potential size of the government’s liability following the
results of the independent valuations and audits of all the Spanish
banks. Those audits were originally expected on 31 July, but are now
expected to be published only by the second half of September. By then,
Moody’s also expects to have more details on the external Asset
Management Company to which impaired real-estate assets of those banks
that need to access public funds will have to be transferred.

-UPCOMING GERMAN COURT RULING ON ESM-

Additionally, the German Federal Constitutional Court indicated in
July that it would take until mid-September before ruling on a temporary
injunction preventing Germany (Aaa negative) from participating in the
ESM. While Moody’s expects the court to ultimately rule in favour of
Germany’s participation, the delay prevented the ESM from being
introduced in July as originally planned and has introduced a further
element of uncertainty.

-POTENTIAL CHANGES AND ADDITIONS TO THE EXISTING CRISIS-MANAGEMENT
FRAMEWORK-

A critical part of the review is focused on assessing the
probability that Spain may require more comprehensive external support
should the banking recapitalisation not succeed in restoring some degree
of confidence in the banking sector and, in consequence, in the
sovereign’s credit standing. In that regard, new developments on, or
changes to, the crisis-management framework can provide insight on this
specific issue.

Moody’s notes that external support can vary in scope and in form.
Limited targeted official interventions supporting market funding can be
of benefit to bondholders if those measures, combined with credible
policy action by the government, prove effective in ultimately securing
market access at sustainable prices.

At the same time, Moody’s believes that while reducing default risk
in the near term, the conditional nature of the kind of support
programmes implemented to-date to support euro area countries following
market-access loss ultimately entails additional risks to bondholders
over the medium-term horizon. Unless fiscal consolidation efforts and
structural reforms were to prove successful, return to the sovereign
debt market at the end of such a programme could prove very difficult,
raising the prospect of debt relief by private sector creditors as a
pre-condition to an extension of further support by official creditors.
Such risks in our view are not compatible with an investment grade
rating.

Moody’s also notes that official support beyond banking
recapitalisation but short of a full package may also pressure the
rating below investment-grade if (1) the combined measures were unlikely
to succeed in maintaining ample market access; or (2) if these measures
were effectively providing the bulk of the Spanish government’s funding
needs through crisis-management tools such as the European Financial
Stability Facility and ESM, and European Central Bank actions that
provide liquidity to government debt markets. Once again, short of the
accompanying fiscal and structural reforms being successful, full return
to market access at the end of these initiatives may prove very
difficult, raising the risk of private sector participation in a debt
relief effort before more official support is provided.

–Frankfurt bureau tel: +49-69-720-142. Email: frankfurt@mni-news.com

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