LONDON (MNI) – Fitch Ratings reiterates its view that Spain’s new
government will need to legislate for additional measures to meet the
deficit targets laid out in the country’s existing Stability Programme.

A full text of the rest of the Fitch Ratings assessment of Spain
follows here:

“The government’s fresh mandate, following the victory, with an
outright majority, of the Popular Party in Sunday’s parliamentary
election, provides a window of opportunity.

“If it is to improve market expectations of its capacity to grow
and reduce debt within the confines of the eurozone, it must positively
surprise investors with an ambitious and radical fiscal and structural
reform programme. Spain has a commitment to fiscal discipline and a
strong recent record of taking additional measures to meet its fiscal
targets.

“Our baseline fiscal projections assume this will happen. Public
debt will therefore peak at 72% of GDP, which is sustainable, despite
higher long-term interest rates. However, the risks to this forecast are
large and have grown with the intensification of the eurozone debt
crisis following the recent EU and G20 summits. Spanish government bond
yields have been pushed higher and near-term growth expectations lower.

“Fitch rates Spain ‘AA-‘ with a Negative Outlook. When we
downgraded Spain from ‘AA+’ on 7 October, we noted that missing official
fiscal targets would put the rating under pressure, as would
weaker-than-expected growth or higher-than-expected bank
recapitalisation costs.

“Regional governments pose the largest risk to Spain’s fiscal
consolidation. The Spanish regions’ aggregate deficit for the first half
of 2011 was 1.2% of GDP. This was only just below to the full-year
deficit target, meaning the central government probably has to surpass
its own target for Spain to hit its overall general government deficit
target of 6.0% this year.

“The negative outlook already takes into account these threats to
Spain’s rating. The high investment grade rating incorporates Fitch’s
judgement that as a solvent and systemically important sovereign, in
extremis, the ECB and/or European Financial Stability Facility/IMF will
step in to prevent a self-fulfilling liquidity crisis”.

–London bureau: +4420 7862 7492; email: ukeditorial@marketnews.com

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