Spain suffers downgrade from Standard and Poor's

19th January 2009, Comments 0 comments

Standard and Poor's said Monday it had lowered its rating on Spain's long-term debt because of concern about the country's economy and public finances.

MADRID—The move will likely increase the cost of government borrowing and intensify strain in the Eurozone, where differences are intensifying between the larger more established economic powers and the weaker nations.

"The downgrade of the sovereign reflects our expectations that public finances will suffer in tandem with the expected decline in Spain's growth prospects," S and P said.

Adding, "The policy response may be insufficient to effectively counter the related economic and fiscal challenges."

Last week, S and P had warned Spain that it faced a possible downgrade and had lowered Greece's rating in the first such move against a large western European country.

Ireland and Portugal are now in the spotlight after also being warned of a possible downgrade.

Ratings agencies are used in financial markets to identify the risks of a default by a borrower.

A downgrade of sovereign rating usually increases the cost of government borrowing since investors require higher interest rates in accordance with higher risk.

Economic strain in the Eurozone result from the inability of countries sharing the euro to resort to devaluing their currencies, which can provide a short-term solution to an economic downturn.

Investors currently discriminate between the debts of countries in the Eurozone, with Germany paying less interest on its bonds than the rest of Europe.

Nations across the world are set to issue trillions of dollars of government bonds this year to pay for expensive economic stimulus packages.

Spain's rating was lowered by one notch to AA-plus from AAA.

AAA is the highest possible rating, while AA-plus indicates that Spain has a very strong capacity to repay its borrowings, according to Standard and Poor's scale.

"We believe that current economic and financial market conditions have highlighted structural weaknesses in the Spanish economy that are inconsistent with a 'AAA' rating," said a statement.

The Standard and Poor's decision was anticipated by the Spanish government. Spanish Economy Minister Pedro Solbes sought to minimise its impact in an interview published Sunday El Pais.

"It's a matter of moving from 'excellent' to 'very good,'" he said.

"Let's not forget that Spain received a triple A rating for the first time in 2004."

He said that while the new rating was "not a negligible matter," it remains "the assessment by a ratings agency of the Spanish situation. But we're not going any further than that."

The Madrid stock market did not react to the news, with the Ibex-35 index up 0.77 percent in early afternoon trade.


0 Comments To This Article