Madrid - Standard and Poor’s cut Spain’s credit rating on
Friday, sending the euro lower and underlining the challenges facing Europe’s
big powers as they prepare to meet G20 counterparts over the eurozone debt
crisis.
S&P, whose move mirrored that by fellow ratings agency
Fitch last week, cited high unemployment, tightening credit and high
private-sector debt among reasons for cutting the nation’s long-term rating to
AA- from AA.
At above 21%, Spanish unemployment is the highest in the
European Union, reflecting a stagnant economy, the collapse of a decade-long
housing boom and cuts aimed at reeling in a public sector deficit which reached
11.1% of GDP in 2009.
High yields on Spanish government bonds point to concerns
that it could be the next eurozone economy to need bailing out after Greece,
Ireland and Portugal, although an unpopular austerity programme has gone some
way to convincing investors that its deficit will fall to 6% of GDP this year
as promised.
S&P announced the downgrade as finance ministers and central bank chiefs from the world’s 20 biggest economies were due to meet later on Friday in Paris amid pressure to find an urgent and convincing solution to the deepening debt crisis.
“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,” S&P said.
It also noted the “incomplete state” of labour market reform
and the likelihood of further asset deterioration for Spain’s banks, and
downgraded its forecast for Spanish economic growth in 2012 to about 1%.
In February, S&P had forecast 1.5 % growth for 2012.
Juergen Michels, economist at Citi in London, said the
market was still wary of developments in Spain’s regional public finances, and
was aware that fiscal problems would not disappear any time soon.
“The central government has made some progress but we are still to see any improvement in regional finances ... (and) the adjustment in the housing market is not finished by any means.”
The spread on Spanish 10-year government bond yields versus their German counterpart were little changed in early trade in Europe compared to Thursday.
Job dilemma
A botched labour market reform in 2010 did little to
alleviate joblessness that is concentrated mainly amongst younger Spaniards,
and a new government after November 20 general elections will be under pressure
to tackle the issue.
The conservative People’s Party is expected to win the
election easily and deepen austerity measures but they have shied away from
presenting specific policy measures for fear of eroding public support.
Like Fitch, which also now rates Spain at AA-, S&P signalled
further possible downgrades for Spain, saying there was still a risk the
eurozone’s fourth-largest economy could slip into recession next year, with a
0.5% contraction.
“We could lower the ratings again if, consistent with our
downside scenario, the economy contracts in 2012, Spain’s fiscal position
significantly deviates from the government’s budgetary targets, or additional
labor market and other growth-enhancing reforms are delayed,” S&P said.
The euro dipped in Asian trade after the downgrade, though
it still remained on track for its biggest weekly rally since January. It last
traded at $1.3753, having shed around a third of cent.
Finance chiefs from outside the eurozone are expected to
speak frankly when they meet their European counterparts at Friday’s G20
meeting, given impatience growing over the crisis and its implications for the
rest of the world.
Canadian Finance Minister Jim Flaherty set the tone late on
Thursday, telling reporters before leaving Ottawa that eurozone actions were
short of what was needed.
On Thursday, Fitch cut credit ratings or signalled possible
downgrades for several major European banks. It downgraded UBS, Lloyd's Banking
and Royal Bank of Scotland. It also placed Barclays Bank, BNP Paribas, Credit
Suisse, Deutsche Bank and Societe Generale on watch negative.