Municipal politics

Madrid City Hall to do away with Fitch and Standard & Poor’s services

Council’s finance section argues that it has no plans to get further into debt Auditors note that existing €4bn owed still needs to be refinanced and warn against default

Madrid Mayor Manuela Carmena.
Madrid Mayor Manuela Carmena.Samuel Sanchez

The city of Madrid will no longer be audited by Standard & Poor’s (S&P) or Fitch.

After meeting with both ratings agencies, the municipal economy and treasury department has decided not to renew the contracts next year.

Madrid has been rated since 2004 and paid slightly over €107,500 for the service this year

Madrid authorities said this decision is based on their plans not to get the city into any further debt – a pledge made by the new leftist government of Mayor Manuela Carmena.

Although both agencies automatically rate countries, regardless of whether there is a commercial relationship between them or not, that is not the case with local and regional governments, which need to sign a contract just like any private company.

Madrid has been rated since 2004 and paid slightly over €107,500 for the service this year.

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In its most recent statement, Fitch established the Spanish capital’s long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BBB+’ with a stable outlook, while S&P rated the debt at BBB/A-2, lowering the outlook from stable to negative.

While the end of the Spanish crisis and new economic growth are attracting more positive forecasts from financial observers, the agencies have adopted a wait-and-see attitude to the victory of Ahora Madrid – a loose coalition of leftist forces – at municipal elections in May.

The new government team is carrying out an internal audit to take stock of existing assets and liabilities and make informed policy decisions. Earlier this year, the Spanish Tax Agency issued a damning report about Carmena’s campaign pledge for a municipal bank, a plan that has since been scrapped.

The decision to end the relationship with S&P and Fitch, effective in 2016, comes after several meetings with the auditors. The Cadena SER radio network has released audio excerpts from the conversations, which reveal moments of tension.

Earlier this year, the Tax Agency issued a damning report about Carmena’s campaign pledge for a municipal bank

At one point, an S&P representative issues a reminder of the negative effect of a hypothetical government decision to not repay – or else to restructure – the city’s debt.

A city representative replies: “To ask the city if it is going to break the law seems like a tricky question. Our goal is not to break the law but to find out what we have so far, in order to be as responsible as possible with taxpayers’ money.”

Public agencies and private firms that issue debt typically hire ratings agencies because investors often demand to know the associated risk.

By deciding to do without these auditors, demand for Madrid debt could shrink, thereby raising borrowing costs. And even if City Hall has no plans for new major expenses, it will still need to refinance existing debt, which stands at around €4 billion – and it will be harder to find investors willing to invest blindly.

English version by Susana Urra.

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