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The three conditions that Moody's puts on Spain to improve its rating


Moody's spoke a few days ago on the rating of Spain (kept the rating at 'Baa1' with a stable outlook), and has now revealed what the conditions are for improve rating from the country. There are three: that there is a "stronger than expected recovery" after this year's deep contraction; that the government present a "credible medium-term fiscal plan" that gives confidence to debt reduction; and that there is a "renewed focus on structural reforms."

These are the "possible triggers" for there to be an improvement in the rating. If these conditions occur, the agency explains, "they would exert upward pressure on the rating" it maintains on Spain. This is how Moody's explains the importance of each of them and why they are key:

1. The importance of a strong economic recovery

According to the agency, if there is a strong recovery of the "deep contraction" that has caused the coronavirus pandemic, as well as a "return to growth rates above other countries in the euro zone", could value improving Spain's rating. And it is that this recovery "would provide additional confirmation that the resistance and competitiveness of the Spanish economy has improved a lot compared to the past."

Right now it is somewhat complicated, given the weight of two of the sectors hardest hit by the Covid-19 crisis, such as the tourism and hospitality, but Moody's says that it would be expected, under a more robust growth scenario, that fiscal results and the debt trajectory "will also be more positive than currently anticipated."

In the words of the agency, both the initial speed of the recovery and the growth results of Spain in the coming years "could be stronger if the Spanish authorities manage to effectively use the very important funds of the European Union they have, with the result of better growth potential and higher productivity. "Something that, in his opinion, can be easily achieved given that the country" has many years of experience in absorbing large (structural) funds from the European Union".

Furthermore, Moody's points out, Spain is "well placed to take advantage of the share of 'green transformation' of the European recovery fund ", although it must not be forgotten that this will require coordination between the central government and the autonomous communities, which represents one of the" main challenges "for the implementation of the funds.

2. Fiscal plan that helps contain the expected increase in debt

Another trigger for a positive rating action would be, Moody's says, the presentation of a "credible medium-term fiscal plan that gives confidence that the public debt ratio will gradually decline in the coming years." Although the agency knows that significant fiscal consolidation is "unlikely" in the short termGiven the depth of the contraction in 2020 and the "still high need to support the recovery in 2021", it continues to trust that the Government of Pedro Sánchez will approve measures that contain the expected increase in public debt.

"Tax reforms to increase Spain's relatively low tax revenues in a structural and growth-friendly way", which could be done through the new General State Budgets (PGE) by 2021 that the Executive aspires to have ready late December or early January, and the application of some of the expenditure review recommendations made by the AIReF "They would probably be positive indications of a credible fiscal strategy," Moody's notes.

3. New approach to reforming pensions and the labor market

Finally, the agency talks about the need to renew the approach that is being given to structural reforms to achieve the aforementioned rating improvement. Specifically, Moody's talks about proposing new measures that help to "guarantee the long-term sustainability of the pension system", since the payroll that is paid does not stop increasing and will continue on that path after linking these benefits to the CPI.

Likewise, the agency also refers to the need to carry out reforms in the labor market that "safeguard the gains in flexibility and competitiveness that the 2012 labor reform"promoted by the PP, and that now the Government of PSOE and Podemos wants derogate.

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