Markets rattled as Fitch cuts Spain's debt rating

29th May 2010, Comments 0 comments

Ratings agency Fitch cut Spain's credit rating due to its poor growth prospects just a day after the embattled government pushed through an austerity plan designed to address fears over its economy.

Stocks slid on the US markets as the news emerged Friday and the euro weakened against the dollar.

Fitch downgraded Spain's rating one notch from the maximum AAA to AA+, arguing that 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."

Reducing "the private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term," said Fitch.

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

Spain's treasury chief, Soledad Nunez, reacted to the Fitch report 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 priorities.

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

But the country's two largest unions, the CCOO and the UGT, have already threatened a national general strike over planned labour reforms announced by Prime Minister Jose Luis Rodriguez Zapatero in February.

News of Spain's downgrading came too late for the European markets, but in New York later Friday, the Dow Jones Industrial Average slid 122.36 points (1.19 percent) to finish at 10,136.63 ahead of a long holiday weekend.

"Fitch's downgrade of Spain reignited traders' worst eurozone fears," said Elizabeth Harrow at Schaeffer's Investment Research.

The euro meanwhile fell to 1.2266 dollars from 1.2354 dollars late Thursday.

The downgrade was a fresh blow to the country's Socialist government, which on Thursday approved tough austerity measures to shore up its public finances amid investor concerns it could follow Greece into a debt crisis.

The unpopular 15-billion-euro (18.5-billion-dollar) austerity plan, passed by just a single vote after the abstention of some opposition deputies, has already been angrily denounced by trade union leaders.

Spain's civil servants, targetted for pay cuts under the plan, will stage a protest strike on June 8.

The government plan is aimed at slashing 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, in the past a major driver for growth.

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 Spain's government debt would 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 would remain very strong and consistent with its 'AA+' rating."

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.

On April 28 Standards and Poor's, another ratings agency, lowered Spain's long-term sovereign credit rating to "AA" from "AA+" arguing its outlook was negative because poor growth prospects threatened its public finances.

© 2010 AFP

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