Standard & Poor's confirms Spain credit rating

1st February 2011, Comments 0 comments

Standard & Poor's confirmed Spain's solid credit standing Tuesday, delivering a stamp of approval to Madrid's reform efforts but warning of a downgrade if spending veers off track.

The New-York based agency said it believed Spain would carry out its promises to axe budget spending, with the deepest cuts due in the short-term, and to ram through structural economic reforms.

Standard and Poor's left its rating on Spain's sovereign long-term debt at a very strong 'AA' and short-term debt at a strong 'A-1-plus'.

Spain's government has slashed spending, including by cutting public workers' wages, so as to lower the public deficit from 11.1 percent in 2009 to 9.3 percent in 2010, and 6.0 percent in 2011.

Madrid aims to meet the European Union-imposed ceiling of 3.0 percent in 2013.

"Nevertheless, we believe that the ratings will remain under pressure," said a report by Standard & Poor's credit analyst Marko Mrsnik.

He cited Spain's high private-sector debt, challenges to the country's competitiveness, tough labor market conditions, and the economy's weak net external financial position.

Spain's economic challenges are evident.

The jobless rate surged to a 13-year record of 20.33 percent at the end of 2010, the highest level in the industrialised world.

And latest figures show the inflation rate hit a two-year high of 3.0 percent in January despite feeble economic activity. The government has tipped a economic contraction of 0.2 or 0.3 percent in 2010.

Standard and Poor's forecast economic growth of 0.7 percent in 2011 but warned of a "significant" risk of a worse outcome because of high unemployment, big debts, bank sector stress and restrictive fiscal policies.

It expected net Spanish government debt to rise to 61.6 percent of annual economic output in 2011, growing to 65 percent in 2012.

In the past eight days alone the government has:

-- Announced new rules that require stronger balance sheets for savings banks, which are heavily burdened by loans that turned sour after the housing market collapse.

-- Approved a plan to raise the retirement age gradually from 65-67 so as to make Social Security affordable longer term.

Standard and Poor's said it believed the costs of recapitalising the banks could surpass a government estimate of 20 billion euros.

Costs could mount if losses on property-related loans are greater than expected, if banks fail to cut expenses, or if there is an external shock that raises the costs of maintaining the financial sector's 760 billion euros in external debt, the agency said.

It praised the retirement reforms.

"We believe that in the medium to long term, the recently adopted pension reform program, if fully implemented, will likely lead to important savings in social security outlays," it said.

Labour reforms aimed at cutting the cost of firing workers and giving companies more flexibility to reduce working hours and staff levels in economic downturns were a "step in the right direction, though stopping short of a fundamental overhaul of the labor market," the agency said.

Spain enjoyed top-notch credit ratings until last year when all three major agencies -- Standard and Poor's, Moody's Investors Service, and Fitch Ratings -- issued one-notch downgrades because of concerns over its debt and weak economic performance.

© 2011 AFP

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