Fitch cuts Spain's debt rating over weak growth prospects

28th May 2010, Comments 0 comments

International ratings agency Fitch said Friday it had downgraded Spain's debt rating because the process of reducing private debt will affect the country's economic growth.

"The downgrade reflects Fitch's assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term," said Brian Coulton, Fitch's Head of EMEA Sovereign Ratings.

Private debt is that of households, companies and banks.

Fitch's downgrading of Spain from the maximum AAA rating to AA+ comes as the Spanish government, under pressure from both its EU partners and the markets, has approved tough austerity measures to shore up its public finances amid fears it could follow Greece into a financial crisis.

The Socialist government hopes to slash the public deficit to the eurozone limit of three percent of gross domestic product by 2013 from a massive 11.2 percent last year.

"Despite government debt and associated interest costs remaining within the AAA range, Fitch anticipates that the economic adjustment process will be more difficult and prolonged than for other economies with AAA rated sovereign governments, which is why the agency has downgraded Spain's rating to AA+," Coulton said.

Fitch warned in a statement that "the inflexibility of the labour market and the restructuring of regional and local savings banks will ... hinder the pace of adjustment, particularly in the aftermath of the real estate boom.

"Consequently, and despite a strong commitment to reducing the budget deficit ... government debt will likely reach 78 percent of GDP by 2013 compared to under 40 percent prior to the onset of the global financial crisis in 2007 and the subsequent recession."

Fitch said it believes the economic recovery "will be more muted than that forecast by the government."

The Spanish government earlier on Friday cut its 2012 and 2013 economic growth forecasts by 0.2 percentage points to 2.5 percent and 2.9 percent.

The government also increased its 2010 unemployment forecast to 19.4 percent from the previous 19 percent, putting the next three years at 18.9 percent, 17.5 percent and 16.2 percent.

Spain entered recession in the second quarter of 2008 as the global financial meltdown compounded a crisis in the property market, a major driver for growth in the preceding years.

Official data released last week showed the economy returned to growth in the first quarter but analysts have warned that any pick-up could be short lived.

Another ratings agency, Standards and Poor's, on April 28 lowered Spain's long-term sovereign credit rating to "AA" from "AA+" and said the outlook was negative on fears the country's poor growth prospects could further weaken its public finances.

© 2010 AFP

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