Spain to lose triple A rating?

Published 22nd Jan 2009

Standard & Poor has threatened to strip Spain of its coveted AAA rating as country's budget deficit explodes, offering the clearest warning to date that even wealthy states are running out of room to borrow...

The move caused fury in Madrid and revived fears in the currency and bond markets about the underlying health of Europe's monetary union.

Spanish officials are irked that S&P has placed Spain's debt on "CreditWatch Negative", a notch lower than the "outlook" alert issued on Irish bonds last week. It is the first time that a AAA country has suffered such a harsh verdict since the start of the global financial crisis.

Such a move typically precedes a downgrade within weeks but the finance ministry insisted this would not be allowed to happen. "There's not going to be a rating downgrade because we are taking measures to overcome the crisis," it said.

Trevor Cullinan and Myriam Fernández, the agency's Analysts, said the housing crash had set off a downward spiral in Spain that would drive the budget deficit above six per cent by 2006, double the EU's Maastricht limit.

"We expect a substantial worsening in the Kingdom's public finances," it said, predicting two per cent contraction in 2009 and a long slump as years of credit excess are slowly purged.

Spain is discovering the limits of action within the eurozone. It can no longer let its currency take the strain, or follow the US, Switzerland, Sweden, Britain, in slashing rates. Indeed, Frankfurt raised eurozone rates last July at a time when Spain's housing crash was already under way. Unemployment has surged to 13.4 per cent, breaking the three million barrier.

Michael Klawitter, from Dresdner Kleinwort, said Spain was now crumbling on every front. "Tax revenue is collapsing. There is a banking crisis and a massive deterioration linked to housing. It is arguable that Spain has already let matters go past the point of no return," he said.

"We are going to see fresh talk about the sustainability of monetary union and it is going to get messy. Spain is the most pro-EMU of the big states so there has not been any backlash against EMU, but who knows what will happen," he said.

Ian Stannard, a Currency Strategist at BNP Paribas, said Spain needs to raise £63 billion this year on the bond markets, both to roll over old debts and to pay for a fiscal rescue package worth one per cent of GDP.

Europe's bond supply will reach £715.5 billion this year, up 15 per cent from 2008. It is far from clear whether the markets can absorb so much debt. Although Spain's public debt is modest at under 40 per cent of GDP, this may not prevent a downgrade.

"The economy is less resilient than any other AAA state. It is more dependent on real estate and tourism, and there is very high corporate debt. Household debt is close to levels in Britain and the US," said Mr Fernandez.

Source: ' TMC '

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