Moody’s has become the first credit rating agency to assess the effects of the investiture agreements between PSOE, ERC and Junts on Spanish debt. According to him, the pacts are “negative for the sovereign debt and positive for the regional ones”, among which that of Catalonia stands out.
This distinction, explains Moody’s in a note, is due to the agreement with ERC which includes the forgiveness of 20% of the debt contracted by the autonomous communities with the Autonomous Liquidity Fund (FLA), equivalent to 15,000 million euros in the Catalan case.
In general terms, he assures when evaluating the agreements, “the implications on credit depend on how the measures are implemented and the Government’s ability to carry out the agenda.” Its assessment does not imply any change in the rating or credit outlook of Spain, Baa1 stable, or of Catalonia, Ba1 stable.
Moody’s, which is with an S
When citing the content of the agreements, he refers to the amnesty, the creation of a new regional financing framework and the forgiveness of the FLA debt, which is the issue on which he places the most emphasis.
“The cancellation of this debt,” he says of the FLA, “will have no effect on sovereign debt metrics, but could raise moral hazard issues and discourage prudent fiscal policies at the regional level, ultimately putting pressure on the public finances,” he says.
However, it also immediately recognizes that “a new fiscal framework that gives Catalonia and other regions more autonomy in terms of income and expenses could potentially mitigate that risk, depending on its design.”
“We hope that the agreements will benefit the credit quality of the debt of the Generalitat of Catalonia and other Spanish regions”, since “lower expenses and debt will strengthen their balance sheets and reduce their deficits, which will contribute to fiscal consolidation, which is positive from a credit point of view”.
Moody’s estimates that debt forgiveness for the different autonomous communities will reach an amount of nearly 45 billion euros, or 3.3% of national GDP. The savings in terms of interest would be around 407 million euros per year.
