Fitch cuts Spain's debt rating over weak growth prospects

28th May 2010, Comments 0 comments

Ratings agency Fitch cut Spain's credit rating on Friday due to the country's poor growth prospects, in a new blow to the government as it struggles to ease market fears of a Greek-style financial crisis.

Fitch downgraded Spain's rating one notch from the maximum AAA to AA+ because the process of reducing "the private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term."

Private sector debt is that of households, companies and banks.

The move comes as the Socialist government, under pressure from both its EU partners and the markets, has approved tough and unpopular austerity measures to shore up its public finances amid investor concerns it could follow Greece into a debt crisis.

The 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.

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. The negative growth has sent unemployment soaring to more than 20 percent this year.

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.

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

"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+," it said.

It also warned 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."

Spain's treasury chief, Soledad Nunez, reacted by emphasizing that the country's rating still remained high, dropping from a mark of "distinction to outstanding."

She also noted that Fitch justified the move by the lack of labour flexibility and by the restructuring of savings banks, two of the government's priorites.

Spanish Prime Minister Jose Luis Rodriguez Zapatero in February unveiled a plan to reform the country's strict labour market rules, although unions have threatened a general strike over the plan.

The government last year unveiled a nine-billion-euro fund to help the country's struggling regional savings banks to merge or restructure.

Fitch said Spain's government debt will likely reach 78 percent of GDP by 2013 compared to less than 40 percent prior to the global financial crisis in 2007 and the subsequent recession.

But it said "the country's credit profile will remain very strong and consistent with its 'AA+' rating."

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.

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.

It also increased its 2010 unemployment forecast to 19.4 percent from the previous 19 percent.

© 2010 AFP

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