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Fitch Managing Director of Sovereign Ratings David Riley on factors leading to the decision to downgrade Spain’s debt three notches to “BBB.”
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Fitch downgraded Spain today three notches and slapped it with a negative outlook and by the way.
The that downgrading rating right now is at triple B that is the worst of all of the three major ratings agencies so.
They have the worst outlook.
Joining me now exclusively to explain is David Reilly managing director of sovereign ratings at Fitch David thank you for being here -- we'll get to the timing and just a minute on this but.
What is it that you see that made you downgrade -- Well -- in Spain faces a number of very serious challenges and and self dealing with excessive levels private some foreign -- The need to rebalance the economy and make it more competitive.
And those -- tackle it is budget deficit but -- don't have to tackle.
What's being an ongoing.
Sort of with Spain which is the banking sector is -- under the weight -- so much.
Bad debt associated with the real estate bubble burst.
-- -- few years ago.
And they're trying to do that against that backdrop.
Also a worsening of the Euro -- crisis more generally because of the failure of European policymakers is to deal.
Decisively with it.
-- the combination of major challenges that Spain faces CT.
We structure rebalance its economy against the backdrop of of over the eurozone crisis.
Mean we concluded that that Spain's rating was some have come down.
Well part of me is saying are too little late on -- but the other part is also asking why the urgency I think there is an anticipated EU bailout coming.
And that could ameliorate the situation could it not.
Well -- suspects in terms of the timing we actually.
It conceded.
A lot of work -- in recent weeks it's simple change.
On updating our assessment of the costs -- Spanish taxpayer picks in the banking sector.
Which we now think is going to be anywhere between 62200.
Billion euros which is substantially -- hasn't.
We had previously.
I'm anticipated -- this wasn't something that was done casually but actually is the culmination no -- well several weeks of work.
Let me ask you David but this is this is a touchy subject but as part of your analysis I would imagine you guys are pretty Smart -- Fitch.
Have you taken into account have you put together models of a partial or complete dissolution of the Euro.
We have.
Started working on different scenarios -- what that might mean.
In terms of the position -- -- crisis and then some of those scenarios of one of those clients Doug.
Include a potential breakup of the results we still think that is an unlikely.
-- common terms of the border.
Break -- -- pity the risks of -- -- the resigned.
Has risen significantly.
And if if -- swiftly -- -- -- and we have and warned that.
Every sovereign -- within the -- that would potentially be at risk.
Fitch let's bring it home has also said that it would consider cutting US's credit rating next year if we don't figure out a way to bring down that debt.
Where do you stand on that you see any progress on that level.
What has been little progress.
M since they budget control act that was -- as part of the increase in the debt ceiling back then I'm older than most of these sort of failure of state doing and you know the -- media -- of congress -- We haven't really -- much progress than we weren't really expecting much progress to be frank until after the congressional and -- of the presidential.
Elections but I would say there -- about the outlook for the US his.
The US economy is is is growing is -- modest recovery but it is the recovery unemployment is pulling those possible -- -- Two people and and in the US would like but I have to say being based in -- and Europe and and looking across servitude to the US.
On the problems in Europe sending more pressing and -- space and denies that the US.
But he yes I think into the day to Washington to get -- back together and more some sort of a plan.
Well again this is this is significant that you're saying the problems in Europe are more significant than what we're seeing in the United States which brings me to perhaps where you are that's the UK.
It's already back in recession that it are they next so cool which of the countries that you're looking up next.
What we do have a negative outlook well AAA rating of of of of the UK and and that reflects.
The concerns we have about the growth prospects both for the UK economy -- you've highlighted the -- -- pulled -- back into recession.
-- about it just because of that -- de leveraging.
That's going on in the UK economy but of course and the significant risk.
It'll -- coming from premier resign and if if if there was.
Significant worsening of the crisis within the eurozone them and of it as possible.
Then -- actually that's gonna put a lot of pressure and -- that the UK economy and that in turn could put pressure on the UK rates.
We're looking at Spanish banks right now the two big ones Banco Bilbao one -- -- -- there are both moving higher by anywhere from three quarters to one single percentage points.
But you know when you when you look at bank's overall they all seemed to be either physically or emotionally tied at globally to each other and that the health of Spanish banks if there were god forbid -- run on those banks that might affect us now.
We're hearing that that out of Washington DC that large banks and small banks.
With at least 500 million dollars in assets will happen -- 2019.
To put in place tougher capital rules.
Under a draft proposal this is from US regulators a proposal which the Federal Reserve board David is expected.
To look at and to you know figure out what's going on there so.
Tell me just quickly how do you view our banks.
We generally view.
The US banks and and the banking -- -- as a whole as.
Being in a -- -- small place and it looked a lot of challenges.
Facing the banking system at least that the ones you've highlighted intensive.
You know it's quite -- -- control is -- to -- Improves capital ratios.
We we do you think that this sort of you know that that did the US about banking sector has bail -- waves.
You know at.
Most of the legacy of -- Financial crisis and may not necessarily going forward being basically peaceful.
So equity investors.
Fundamentally intensive the health of the banking sector we think he's the boat he's speaking under the positive trend on the way.
David thank you very much for joining us David Riley at Fitch and Fitch of course has just downgraded by three notches.
Spain and Spanish debt so we appreciate you coming on the clarify everything.
