By Nick Mann | 11 October 2012
Standards & Poor’s has downgraded Spain’s credit rating as its ‘severe’ recession deepens and doubts mount about the eurozone’s commitment to help.
The country’s triple-B plus rating has been revised to triple-B minus, just one level above junk status. The ratings agency also confirmed its negative outlook on Spain’s future prospects. It warned that the rating could be cut further if Spain’s public debt rose significantly and support for the government’s reform agenda fell.
‘The downgrade reflects our view of mounting risks to Spain's public finances, due to rising economic and political pressures,’ S&P explained.
‘The deepening economic recession is limiting the government's policy options,’ it added.
In particular, S&P highlighted growing tensions between Spain’s central and regional governments, and the financial difficulties being faced by some of those regions, as likely to restrict the central government’s policy options.
Rising unemployment and potential increases in pension payments also meant Spain’s 2013 budget was based on ‘overly optimistic’ assumptions, including a growth forecast of –0-5%.
Meeting budget targets for 2012 and 2013 would require additional consolidation measures, S&P said, which could ‘amplify the economic recession’. This was particularly likely if ‘a more determined eurozone policy response is unable to materially improve the financing conditions in the economy and stabilise domestic demand’.
Criticising the eurozone response to Spain’s difficulties so far, S&P said the ‘uncertain trajectory and timing’ of the single currency bloc’s policy making was affecting Spanish business and consumer confidence and therefore the country’s ability to grow its economy.
Improvements in the Spanish banking sector hinge on progress towards the full banking and economic integration of the eurozone, following through with June's agreement to bail out banks directly instead of via governments.
‘We believe implementing these agreements could help to stabilise the eurozone and contribute to arresting any further weakening in the creditworthiness of sovereigns in the so-called periphery,’ S&P said.
The agency added that, for it to revise its negative outlook to stable, the government’s budgetary and structural reform measures and the support provided by the eurozone would have to stabilise Spain’s credit situation.
