Fitch cuts Spain’s debt rating over weak growth prospects

Ratings agency Fitch said Friday it had cut Spain’s credit rating due to its weak growth prospects, in a new blow to the government as it struggles to ease market fears of Greek-style finance crisis.

Fitch downgraded Spain’s rating 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 market fears it could follow Greece into a financial 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.

“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+,” Fitch said.

It 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.

Spanish Prime Minister Jose Luis Rodriguez Zapatero in February unveiled a plan to reform the country’s strict labour market rules. But 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 it believes the economic recovery “will be more muted than that forecast by the government.”

But it said “the country’s credit profile will remain very strong and consistent with its ‘AA+’ rating, even in the event of some slippage relative to official fiscal targets.”

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.

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.

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.

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.