Standard and Poor's downgrades Spain rating

14th October 2011, Comments 0 comments

Standard and Poor's downgraded Spain's credit rating Friday citing sky-high private debt, weak economic growth and towering unemployment.

Importantly, the New York-based agency also predicted Spain would miss its targets to cut the public deficit in 2011 and 2012, a grave concern for financial markets.

The downgrade reinforced worries about leading actors in the eurozone debt crisis just as financial czars from the Group of 20 leading economies gathered in Paris for tense pre-summit talks.

Standard & Poor's lowered Spain's long-term credit rating by one notch to "AA-minus" from "AA" with a negative outlook pointing to a risk of more cuts ahead.

Spain's short-term ratings were confirmed at "A-1-plus".

The blow came three days after Standard & Poor's downgraded the credit ratings of top Spanish banks, including Santander and BBVA.

Lower credit ratings tend to make it costlier to borrow but Spain is already paying high risk premiums on the bond markets and there was a negligible impact on the market.

"Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain's main trading partners," Standard and Poor's said.

"The financial profile of the Spanish banking system will, in our opinion, weaken further, with the stock of problematic assets rising further."

The Spanish economy slumped into recession in the second half of 2008, battered by a global financial meltdown and the collapse of a property bubble. It stabilised in 2010 but growth remains anaemic.

Standard & Poor's focussed in particular on the high level of private debt, much of it funded by foreign lenders, which it said would be the "key rating constraint for the foreseeable future."

Short-term external private debt was equal to 50 percent of Spain's annual gross domestic product, a level it described as "high", leaving the economy vulnerable to the whims of foreign debt markets.

Spain's public debt was modest compared to eurozone partners, at 65.2 percent of GDP as of June 30, however.

Standard and Poor's predicted the public debt would not rise much above 70 percent of GDP even if Madrid has to pump more money into banks, which are saddled with property-related loans turned sour.

But foreign private debt at such a high level increased uncertainty about the economy, it said, slashing its economic growth forecasts to 0.8 percent for this year from 1.5 percent eight months ago.

High unemployment -- 20.89 percent in the second quarter of this year, the highest in the industrialized world -- would further drag on the economy, it said.

The agency cast doubt on Spain's promise to reduce its annual public deficit from the equivalent of 9.3 percent of GDP last year to 6.0 percent of GDP this year, 4.4 percent in 2012 and 3.0 percent in 2013.

The deficit-cutting targets are at the heart of economic policy for the ruling Socialist government, widely expected to be toppled by the conservative opposition Popular Party in November 20 elections.

Indeed, it is now scrambling to raise extra money in 2011 to meet those targets -- telling firms to pay tax installments early, lowering state spending on medicines and stimulating new home purchases with a tax cut.

But Standard and Poor's predicted failure, forecasting a public deficit of 6.2 percent this year and 5.0 percent in 2012 as local and regional governments fail to meet budget targets.

The agency welcomed last month's Spanish constitutional reform limiting future budget deficits and curbing the accumulated debt as a sign of its commitment to budget discipline.

Fitch Rating also slashed Spain's sovereign credit rating by two notches this month, blaming weak economic growth, the eurozone debt crisis and regional government spending.

© 2011 AFP

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