SPAIN LOST its triple-A credit rating from Standard Poor’s yesterday when the ratings agency downgraded the country’s long-term sovereign debt because of its deteriorating public finances.
SP lowered its rating by one notch to double-A-plus, arguing that the global economic crisis had highlighted “structural weaknesses” in the Spanish economy that were inconsistent with triple-A, the highest rating.
The decision underscored the strains within the euro zone between robust northern economies and those in the south – Spain, Portugal, Italy and Greece – that would benefit from a devaluation of the common currency.
The euro reacted by falling against the dollar and the yen, and the spread in bond yields between Spain and Germany, Europe’s biggest economy, widened to record levels in anticipation of the SP announcement.
The cost of insuring Spanish government bonds against default through credit default swaps rose to a record high, with investors concluding that Spanish assets were now more risky.
Spain is the first triple-A-rated nation to be downgraded by SP since Japan in 2001, and the first since the financial crisis erupted in August 2007. It is also the second euro zone country to suffer a downgrade in a week. Greece had its A rating – which is five notches below triple-A – dropped to A-minus last Wednesday.
In a statement SP said the Spanish downgrade reflected its belief “that public finances will suffer in tandem with the expected decline in Spain’s growth prospects, and that the policy response may be insufficient to effectively counter the related economic and fiscal challenges”.
Madrid expects a budget deficit this year of 5.8 per cent of gross domestic product. However, the European Commission predicts the deficit will reach 6.2 per cent of GDP, and SP made a deficit forecast of 6.6 per cent. – (Financial Times service)
