S&P
cuts Spain credit rating to BBB-minus, near junk
Standard
& Poor's on Wednesday cut Spain's sovereign credit rating to
BBB-minus, just above junk territory, citing a deepening economic
recession that is limiting the government's policy options to arrest
the slide.
10
October, 2012
The
S&P downgrade comes with a negative outlook reflecting the credit
ratings agency's view that there are significant risks to economic
growth and budgetary performance, plus a lack of clear direction in
euro zone policies.
"In
our view, the capacity of Spain's political institutions (both
domestic and multilateral) to deal with the severe challenges posed
by the current economic and financial crisis is declining," S&P
said in a statement.
S&P's
two-notch downgrade from BBB-plus brings it in line with Moody's
Investors Service's Baa3 rating. Moody's has Spain on review for a
possible downgrade.
Both
firms have Spain just on the cusp of junk status. Fitch Ratings has a
BBB rating on Spain, one notch higher, but also with a negative
outlook.
A
spokeswoman at Spain's Economy Ministry told Reuters the government
had no comment on the ratings action.
The
country has been in recession since earlier this year, its second
economic contraction in just a few years, and unemployment is
stubbornly high at close to 25 percent with a return to job creation
still two years away.
Falling
tax revenue and rising costs of unemployment benefits are confounding
the government's efforts to hit a 2012 deficit reduction target of
6.3 percent of gross domestic target agreed with the European Union.
Both
the International Monetary Fund and Spain's own Central Bank cast
doubt on the savings envisioned in Prime Minister Mariano Rajoy's
2013 budget, saying they are based on a too-rosy outlook for the
economy.
In
the wake of the downgrade, the euro dropped about 0.25 percent to
$1.2865 in late New York trade from just under $1.29 prior to the
news.
"This
is weighing on the euro. A downgrade from S&P could be followed
by a downgrade from Moody's, and while S&P did not downgrade
Spain to junk, Moody's might," said Kathy Lien, managing
director at BK Asset Management in New York.
"If
Moody's goes to junk status, that's even more significant, and this
adds to the pressure on Moody's to make a decision. It could lead to
higher bond yields in Spain and push the government closer to asking
for a bailout," Lien added.
In
European trade earlier on Tuesday, ten-year Spanish bond yields fell
1 basis point to 5.83 percent. Those yields spiked above 7 percent
earlier this year, but have since come down on a European Central
Bank bond-buying plan.
SOCIAL
DISCONTENT AND EURO ZONE DOUBTS
Prime
Minister Rajoy's centre-right People's Party has an absolute majority
in parliament and so far has been able to pass spending cuts and
economic reforms without any problem.
However,
street protests have increased in recent months as Spaniards revolt
against public sector wage cuts and lower spending on education and
healthcare. Resentment is also rising over huge public bailouts for
the country's crippled banks, while social benefits are cut.
Although
Rajoy's PP governs 11 of 17 Spanish regions, which have been forced
to make massive budget cuts, S&P noted that tensions between the
central and regional governments are rising, "leading to
substantially diluted policy outcomes."
The
agency said Rajoy's resolve will be "repeatedly tested by
domestic constituencies."
Although
the European Central Bank has set up a bond-buying program that would
support Spanish debt prices on the secondary market, Spain has balked
at signing up for international aid because it would come with harsh
conditions.
"We
view the Spanish government's hesitation to agree to a formal
assistance program ... as potentially raising the downside risks to
Spain's rating," S&P said in its note.
The
agency also said that euro zone policy makers must show progress on
implementing a banking union that would allow Europe to directly
recapitalize Spanish banks, taking the weight off of the Spanish
government.
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