Spain appeals for calm after debt downgrade

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The Spanish government appealed for calm from investors on Wednesday following a downgrade in its credit rating, a day after similar downgrades for Greece and Portugal sent shockwaves through the markets.

S&P said it was lowering Spain's long-term sovereign credit rating by one notch to "AA" from "AA+" because the country was "likely to have an extended period of subdued economic growth, which weakens its budgetary position."

The agency also said its outlook for Spain was negative and the country could face another downgrade in a statement that sent the euro plunging to a one-year low against the dollar and European stock markets tumbling.

Markets are especially sensitive to Spain's fiscal situation because of the size of its economy, which is Europe's fifth largest. European banks also have far greater exposure to Spanish debt than to Greek or Portuguese debt.

S&P downgraded Greece's bonds to junk status on Tuesday and cut Portugal's long-term credit rating by two notches, causing the markets to plunge on fears that the debt debacle in Athens was spreading to other eurozone countries.

"The downgrade of Spanish government debt by S&P is another alarming sign that the effects of the Greek crisis are spreading," said Ben May, European economist at London-based market research firm Capital Economics.

Phil McHugh, a dealer at forex trading company Currencies Direct, said the contagion from the Greek financial crisis would likely spread to other nations on the fringe of the euro zone that are also burdened by big deficits.

"We could now see this contagion filtering through to Ireland and Italy" after Portugal, Greece and Spain, he said.

Spain's Deputy Prime Minister Maria Teresa de la Vega said the government was taking the measures needed to bring the public deficit down from 11.2 percent of gross domestic product to within a 3.0-percent limit set for the 16 nations that use the euro by 2013.

"We are adopting all the measures needed to meet our commitments," she told reporters in parliament shortly after S&P Spain's credit rating.

At the start of the year the government announced a plan to slash 50 billion euros (66.5 billion dollars) from the budget over three years which includes cuts in government spending, a virtual freeze in the hiring of civil servants and some tax rises.

It has also proposed raising the legal retirement age from 65 to 67 and wants to cut the cost of firing workers as part of efforts to revive the economy and slash the unemployment rate, which is around 20 percent.

But many financial analysts are sceptical that the plan will succeed because they argue it is based on economic growth forecasts that are far too rosy.

While the Spanish government predicts GDP will grow by an average of 1.5 percent during 2010-13, S&P on Wednesday revised down its average estimate for annual GDP growth in Spain between 2010-2016 to 0.7 percent from 1.0 percent.

"We now believe that the Spanish economy's shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed," said S&P credit analyst Marko Mrsnik.

The euro sank to 1.3128 dollars on Wednesday, reaching a level last seen in late April 2009. Major European stock markets also fell again, with shares in Madrid plunging by 2.99 percent.

S&P said it still believed that the Spanish government could meet its target of reducing the deficit to 9.8 percent this year from 11.2 percent in 2009.

But it projected a deficit exceeding five percent in 2013, much higher than the government's target.

"Consequently, we estimate that gross government debt is likely to rise above 85 percent of GDP in 2013 and continue to trend higher until the middle of the decade," S&P said.

The agency said it could revise its outlook to stable "if the government meets or exceeds its fiscal objectives in 2010 and 2011 and Spain's economic growth prospects prove to be more buoyant than we currently envisage."

© 2010 AFP

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