Standard & Poor’s Corp. on Wednesday downgraded Spain’s long-term credit-rating by one notch, in a new sign of a deepening euro-zone sovereign debt crisis.
Spain become the third euro-zone nation to be hit with a S&P downgrade in just two days, following steeper cuts on Portugal and Greece. On Tuesday, S&P slashed its ratings on those nations, even junking Greece, amid concerns that nation’s policy options are narrowing because of weak economic growth prospects.
The ratings actions underscore mounting concerns that Greece could default on its debt and that European Union authorities are failing to halt contagion of its financial problems to other highly indebted euro-zone sovereigns. Spain, the euro zone’s fourth largest economy, is grappling with a double-digit budget deficit and faces years of weak growth following the collapse of a decade-long construction boom.
«Spain is the 800 pound gorilla in the room. Greece and Portugal are small countries, but Spain is about five times their size with regards gross domestic product,» Win Thin, senior currency strategist at Brown Brothers Harriman & Co, said in a note to investors.
The news of the Spanish downgrade sent equities in Spain broadly lower. S&P said it reflects a downward revision of its medium-term macroeconomic projections.
«We now believe that the Spanish economy’s shift away from credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,» said analyst Marko Mrsnik. Mr. Mrsnik said S&P now projects that real gross domestic product growth will average 0.7% annually through 2016, versus the prior expectation of above 1% annually over that period.
In an interview with state-owned newswire EFE, Spanish Deputy Finance Minister Jose Manuel Campa said he was «surprised» by the downgrade as it is based on long-term growth projections for the Spanish economy that are «very low, outside of the range of [analyst] forecasts we have.» He added that he thought it would have a «limited» impact on financial markets.
In addition, S&P took into account the possibility that Spanish public and private sector borrowing costs could remain elevated this year and next and further slow Spain’s recovery from the current recession.
S&P warned that «additional measures are likely to be needed to underpin the government’s fiscal consolidation strategy and planned program of structural reforms.»
Main factors dampening Spain’s medium-term growth prospects include private sector indebtedness, which S&P estimates is higher than that of many of Spain’s peers, as well as high unemployment, a fairly low export capacity, and an unwinding of the government’s fiscal stimulus as part of its current efforts to reduce general government deficit to 3% of GDP by 2013.
On Wednesday, S&P lowered Spain’s long-term rating to double-A, which is just two notches under triple-A. But the rating has a negative outlook, meaning future downgrades are possible. S&P said a downgrade could occur if Spain’s fiscal position underperforms to a greater extent than it currently anticipates.
Formerly an engine of euro-zone job creation and economic growth, Spain suffered an abrupt reversal of fortune when the global financial crisis precipitated the collapse of the country’s formerly buoyant construction industry.
But Spain’s rating is significantly higher than Greece and Portugal. Greece’s latest rating is at double-B-plus, eight notches under Spain, while Portugal is at single-A-minus, or four notches lower.
S&P separately said that the downgrade to Spain has no immediate ratings impact on the country’s banks.
Source: online.wsj.com.
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