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Why Standard & Poor's Rates Spanish

LRGs Basque Country, Bizkaia, And

Navarre Higher Than The Kingdom of
Publication date: 31-Jan-2012 20:07:25 GMT

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MADRID (Standard & Poor's) Jan. 31, 2012--Standard & Poor's Ratings
Services rates three Spanish regions--the Autonomous Community of the
Basque Country (AA-/Negative/--); the Historical Territory of Bizkaia (AA-
/Negative/A-1+), a province of the Basque Country; and the Autonomous
Community of Navarre (AA-/Negative/--)--two notches higher than their
sovereign, the Kingdom of Spain (A/Negative/A-1).

Under our criteria for rating local and regional governments (LRGs), an
LRG can be rated higher than its sovereign only if we believe it exhibits
threefundamental conditions:

- The ability to maintain stronger credit characteristics than the

sovereign in a stress scenario;

- An institutional framework that is predictable and that limits the

risk of negative sovereign intervention; and

- The ability to mitigate negative intervention from the sovereign

thanks to high financial flexibility and independent treasury

When an LRG meets these three conditions, in most instances we expect

the rating differential between the LRG and its sovereign to be limited to
one notch.

Exceptionally, our ratings on Basque Country, Bizkaia, and Navarre are two
notches higher than the rating on Spain owing to our view that they
strongly meet these conditions. Specifically, they:

- Display unique economic and financial features in Spain;

- Have a special constitutional and legal status; and

- Manage their liquidity independently and generally maintain sound

liquidity positions.

Relative to Spain, the Basque Country and Navarre have high income per
capita and lower unemployment rates, at around 13% versus the Spanish
national average of 23%; significantly healthier budgetary performances;
and strongly industrialized and export-oriented economies with excellent

Based on the latest available information, the three regions were not
posting budgetary deficits as of third-quarter 2011. Bizkaia is the core
economy of, and displays the same distinctive economic features, as the
Basque Country.

The special constitutional and legal status of the Basque Country, Bizkaia,
and Navarre, in our opinion, affords them broad fiscal autonomy. Among
others, they have unique taxing powers relative to other Spanish regions,
including collection, management, and ample room to implement tax
legislation. They make no substantial equalization transfers to other
regions, in our view. Lastly, protective clauses shelter the Basque Country
and Navarre against new expenditure responsibilities that the central
government may seek to impose.

We believe the special status of the three LRGs is unlikely to change in the
foreseeable future.

For further details on rating LRGs higher than their sovereigns, see our
criteria article "Methodology: Rating a Regional Or Local Government
Higher Than Its Sovereign," published Sept. 9, 2009, on RatingsDirect on
the Global Credit Portal.

For our rationales behind today's rating actions on the three regions, see "
Spain's Regions of The Basque Country And Navarre Downgraded To 'AA-'
After Sovereign Downgrade; Outlook Negative" and "Spain's Historical
Territory of Bizkaia Long-Term Rating Lowered To 'AA-' After Sovereign
Downgrade; Outlook Negative."

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Primary Alejandro Rodriguez Anglada, Madrid (34) 91 788-

Credit 7233 (34) 91 788-7233 ;

Secondary Lorenzo Pareja, Madrid (39) 02-7211-1214;


Additional International Public Finance Ratings Europe;


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