Photo: Spains S&P Rating Drop
Ratings agency Standard & Poor’s downgraded Spain’s long-term sovereign credit rating by an additional two notches, citing a deepening of the euro-zone crisis and “external financing risks in the private sector” that could impede growth and hinder the government’s ability to reduce a high public-sector deficit.
The move, part of a series of downgrade actions Friday also affecting eight other euro-zone countries, “reflects our opinion on the impact of deepening political, financial and monetary problems within the euro zone, with which Spain is closely integrated,” S&P said.
The New York-based financial-services company said the downgrades across the region were prompted by its assessment that recent actions by policymakers in past weeks may be insufficient to tackle “ongoing systemic stresses” in the euro zone.
Those “stresses” include tighter credit conditions, higher risk premiums for an expanding group of bond issuers, a “simultaneous attempt to delever by governments and households,” weakening economic growth prospects, and lack of agreement among European policymakers over the optimal way to solve the problems.
S&P also said a policy solution that exclusively relied on belt-tightening was not the answer, scolding wealthier European nations for blaming current financial turmoil primarily on “fiscal profligacy at the periphery of the euro zone.”
“In our view, however, the financial problems facing the euro zone are as much a consequence of rising external imbalances and divergences in competitiveness between the (region’s German- and French-led) core and the so-called “periphery,” S&P said, referring to countries such as heavily indebted Greece, Ireland and Portugal, all of which have received EU/IMF bailouts.
In that respect, “a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues,” the agency said.
It also said a Dec. 9 EU summit held to address the crisis “has not produced a breakthrough of sufficient size and scope to fully address the euro zone’s financial problems.”
“In our opinion, the political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those euro-zone sovereigns subjected to heightened market pressures,” S&P said.
Referring to the downgrade of Spain’s credit rating from AA- to A with a negative outlook, the ratings agency said the move was justified because the country’s external financing costs were likely to remain high for an extended period due to its “high gross external financing requirements.”
S&P also pointed to several country-specific factors to justify the downgrade: “structural savings-investment imbalances, high levels of short-term external debt, and front-loaded amortization requirements in the first half of 2012.”
Despite the negative outlook for Spain’s rating, the agency said the Iberian nation’s economy was wealthy and “relatively diversified” and praised the structural reforms underway and the country’s moderate - albeit growing - net general government debt.
S&P had lowered Spain’s sovereign credit rating by one notch in October, while the three main ratings agencies, which also include Moody’s and Fitch Ratings, all have stripped away Spain’s AAA credit rating since the start of 2009.
Friday’s wider downgrade actions also hit eight other euro-zone countries, most notably France and Austria, whose coveted AAA ratings were lowered by one notch to AA+.
The credit ratings of Italy, Malta, Slovakia, Slovenia, Portugal and Cyprus also were downgraded, with the ratings of the latter two falling into “junk,” or speculative-grade, territory.
S&P left the AAA ratings (the highest level) of Germany, the Netherlands and Finland unchanged, while Belgium, Estonia, Ireland and Luxembourg also avoided a downgrade.
Two weeks ago, new Spanish Prime Minister Mariano Rajoy’s conservative Popular Party government introduced a tough austerity package of 8.9 billion euros ($11.5 billion) in spending cuts and an across-the-board increase in personal income tax.
The plan also includes a continued freeze on civil servants pay - already cut by an average of 5 percent in 2010 - and a freeze on Spain’s minimum wage, which, at 641 euros ($824) a month, is among the lowest in the European Union.
The PP administration has justified the stringent austerity by citing figures that show Spain had a cumulative public-sector deficit last year equal to 8 percent of gross domestic product, not the 6 percent forecast by the previous Socialist government.
The country is aiming to bring the public-sector deficit down to 3 percent of GDP by 2013 in line with EU mandates.
Spain’s unemployment rate, nearly 22 percent, is the highest in the developed world and more than 45 percent of Spanish youth are without jobs.
Anger over persistent high and rising unemployment played a major role in the PP’s landslide victory over the incumbent Socialists in the Nov. 20 elections.
The new government, meanwhile, has warned that the country is on the brink of falling into recession for the second time in two years.
The effects of the global recession were aggravated in Spain by the collapse of a long construction and property boom that had made the country’s economy the envy of most of Madrid’s European partners.