MARKETS SHRUGGED off a downgrade of Spain by rating agency Standard Poor’s as the euro rose amid expectation of a comprehensive deal to settle Europe’s sovereign debt crisis.
The downgrade of Spain came as Italian prime minister Silvio Berlusconi survived a confidence motion, prolonging the life of an ailing government which is relying on European Central Bank bond purchases to keep its borrowing costs in check.
Many key elements of Europe’s new “grand bargain” plan to confront the turmoil in debt markets remain to be settled in advance of a crucial EU summit tomorrow week in Brussels.
With France and Germany at loggerheads over the expansion of the euro zone bailout fund and the second Greek bailout, Europe faces renewed pressure to move forward quickly at a meeting this weekend of G20 finance ministers.
However, moves to escalate the battle have already spurred optimism in markets.
European shares rose 0.8 per cent yesterday, the euro rose 0.7 per cent against the dollar and shares on Wall Street rose 1 per cent when new US data pointed to a rise in retail sales.
Alongside Italy, Spain remains heavily exposed to the crisis in the debt markets. Although Madrid has kept some of the pressure at bay by adopting tough austerity measures, SP said the outlook for its long-term rating was negative as the agency lowered its rating on the country to AA- from AA. The downgrade will add to the country’s borrowing costs at a time when it, too, is being supported by the ECB’s emergency bond-buying campaign.
Spain’s socialist government is forecast to lose an early general election next month, a poll in which Spanish prime minister José Luis Zapatero is not seeking re-election.
Setting out the rationale for the downgrade, SP expressed concern about high unemployment, the risk of a “harsher repricing” in the housing market, and uncertainty about the impact of contentious labour-market reforms.
“We believe the government could miss its fiscal target due to budgetary slippages at the local and regional government levels and in social security, despite a better-than-expected central government deficit,” SP said.
The move by SP came amid reports citing government officials which said Spain was on course to miss its deficit target this year.
Finance minister Elena Salgado insisted the government had more room for manoeuvre than anticipated due to lower interest payments and revenues from the sale of wireless frequencies.
