US ratings agency Moody's out with a note on Spain 2 Feb

  • challenging due to a number of structural weaknesses inc imblances in social security system
  • continued political tension over Catalonia will constrain economic activity both in the region and Spain
  • high debt levels will continue to constrain credit profile

Words of caution from Moody's understandably.

"Spain will continue to benefit from the favourable tailwinds provided by the euro area recovery. But continued political tension over Catalunya - which accounts for 19.1% of Spanish GDP - will constrain economic activity, both in the region and in Spain as a whole.

The country's moderate fiscal strength reflects budget deficits and increases in its debt burden in recent years. Moody's expects the public sector debt ratio to stabilise at around 99% of GDP before declining gradually.

Spain's very high debt levels will continue to constrain the sovereign credit profile, despite the recent improving trends in economic, fiscal and financial data.

The future path of economic growth, structural fiscal reforms and the performance of the regional governments' budgets will be key drivers of deficit and debt reduction. Spain's fiscal dynamics remain challenging due to a number of structural weaknesses, including imbalances in the social security system.

Spain's moderate susceptibility to event risk is driven by domestic political risk linked to Catalunya. While Moody's continues to believe that the probability of Catalan independence remains low, the very rapid escalation in tensions, together with the ongoing political impasse, suggest that it has risen somewhat over the past year, with negative implications for the economic and policymaking environment.

A rapid resolution of the political crisis over Catalunya could allow recently positive economic and financial developments to dominate, which would benefit Spain's credit profile. That said, any resolution which increased the fiscal autonomy of Spain's regions could carry offsetting negative implications for the sovereign, given the challenges which regional finances have posed to the general government finances in recent years."

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