By Nick Mann | 8 June 2012
Fitch sharply downgraded Spain’s credit rating from ‘AAA’ to ‘B’ last night due to the rising cost of an expected bailout of the country’s banks and ‘policy missteps’ at a European Union level.
A projected increase in government debt and the expectation that Spain will remain in recession throughout 2012 and 2013 also contributed to the decision. Another factor was the increased likelihood of the country needing external support to recapitalise and restructure its banking sector.
Fitch previously estimated the cost of this exercise at €30bn – equivalent to 3% of Spain’s gross domestic product – but now expects it to cost between €60bn and €100bn.
The ratings agency also criticised the failure to create a credible firewall to prevent the spread of the financial crisis from Greece to elsewhere in the eurozone. It said Spain was ‘especially vulnerable’ to this contagion due to its high level of foreign indebtedness, currently equal to 90% of its GDP.
Fitch said: ‘The dramatic erosion of Spain's sovereign credit profile and ratings over the last year in part reflects policy missteps at the European level that in Fitch's opinion have aggravated the economic and financial challenges facing Spain as it seeks to rebalance and restructure the economy.
‘The intensification of the eurozone crisis in the latter half of last year pushed the region and Spain back into recession, exacerbating concerns over sovereign and bank solvency. The absence of a credible vision of a reformed European Monetary Union and financial “firewall” has rendered Spain and other so-called peripheral nations vulnerable to capital flight and undercut their access to affordable fiscal funding.’
Raising the potential for a further downgrade, Fitch said its current rating was predicated on Spain securing the external funding needed to bail out its banks.
The rating is not reliant on a ‘full-fledged’ bailout of the country’s economy but the downgrade has prompted speculation that Spain will follow Greece, Ireland and Portugal in receiving support from the EU and International Monetary Fund.
