Cognitive Dissonance at Moody’s

Moody’s Cuts Ratings on Catalonia, Four Other Spanish Regions – Bloomberg.

Spain and the United States have different forms of government. The U.S. is a federal republic in which our 50 sovereign states form a central government through a federation. Since the states are self-governing entities, they are completely responsible for their budget deficits. As a result, virtually every state in the union is prohibits itself from running  a deficit. If any state exhausts its funding, it has no recourse and will default.

Spain is not a republic. Its central government is on the hook for all of the deficits run by its regions. Each of these regions is required to maintain certain social programs and receives money from the central government to fun them. If the region does have enough money to pay for these programs, it can run a deficit by issuing debt to fill the budget gap.

Since the onset of the Spanish situation, the regions have been unable to sell debt to the markets. The central government is now responsible for filling budget shortfalls in the regions. Yet, Moody’s seems blithely unaware of this.

While it has downgraded several of Spain’s regions, Spain’s debt rating itself is mystifyingly levitating at investment grade. Moody’s refusal to downgrade Spain is akin to Chevrolet, Buick and Cadillac being downgraded without GM suffering itself.

This lack of action on Moody’s part is politically motivated. Their are serious consequences to Spain losing investment grade status. Its debt would be expelled from major sovereign debt indices meaning that most investment managers could no longer invest in it.

Moody’s either does not wish to be responsible for a market panic, or governments are twisting its arm to hold Spain’s rating for now, maybe both.

For fun, here is a list of other BBB rated countries from ZeroHedge. Note that the European countries are allowed to run much higher budget deficits than their brethren:

The markets do not buy these ratings anyway; what matters is the yield.


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