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Europe’s Financial Seism Reaches Spain: S&P Downgrades Credit Rating

Deputy Prime Minister, Maria Teresa de la Vega, appealed for market calm

International credit rating agency Standard and Poor's downgraded on Wednesday Spain's credit rating from “AA+” to “AA” with a negative outlook. The move comes a day after S&P gave Greek bonds a junk rating and lowered Portugal's credit rating from “A+” to “A-”.

“In our opinion, Spain is likely to have an extended period of subdued economic growth, which weakens its budgetary position,” said S&P in a statement. News of the downgrade drove the Euro to a one-year low against the US dollar, touching 1.3128 in the afternoon on Wednesday.

Spain's Deputy Prime Minister, Maria Teresa de la Vega, appealed for market calm, saying the government had “a very serious plan of fiscal consolidation and deficit reduction.”

“We now believe that the Spanish economy’s shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,” Standard & Poor’s credit analyst Marko Mrsnik said. S&P based its latest decision on the fact that the Spanish economy is set to grow at an average 0.7% from 2010 to 2016, contrary to a first estimate of an average above 1% for that period.

The risk-rating agency mentions the private sector indebtedness, equivalent to 178% of GDP, inflexible labor legislation, limited export capacity and prospects of unemployment further increasing to 21%. S&P also points out that Spain’s budget deficit is expected to remain above 5% by 2013, well above the 3% of the EU stability pact. Observers believe more credit downgrades are possible amid fears that Greece's debt problems are spreading to other parts of Europe.

Meantime, earlier this week the Bank of Spain revealed that Spain’s outstanding government debt totalled 461.99 billion Euros at the end of 2009, having risen 33.9% from the level at the end of the previous year due to measures taken to deal with the recession. The sharp rise in public debt was a result of programs created to stimulate the economy and deal with the severe recession, the Bank of Spain said.

Spain also dealt with a higher level of debt amortization last year than in 2008, Bank of Spain monetary policy department chief Javier Maycas said. Net debt issuance totalled 116.88 billion Euros in 2009, well above the 51.75 billion Euros in debt issued in 2008.