Hot on the heels of Greece comes the latest sovereign downgrade: Spain’s been stripped of its triple-A rating by S&P.
About time too, one might say. From the FT:
Spain on Monday lost its triple-A sovereign credit rating from Standard & Poor’s when the rating agency downgraded the country’s long-term debt because of its deteriorating public finances.
S&P lowered its rating to AA+ from triple-A, arguing that the global economic crisis had highlighted “structural weaknesses” in the Spanish economy that were inconsistent with the highest rating.
In a statement, S&P said the downgrade reflected its belief “that public finances will suffer in tandem with the expected decline in Spain’s growth prospects, and that the policy response may be insufficient to effectively counter the related economic and fiscal challenges”.
As part of the eurozone, Spain has no independent monetary or exchange rate policy. Eurozone membership thus protected Spain from exchange rate crises, said S&P, but “also puts greater onus on microeconomic and fiscal policies”.
Spain’s own government is now forecasting a 1.6 per cent fall in GDP in 2009 — driven by a 9 per cent slump in investment and a subsequent 3.9 per cent dip in employment. Inflation meanwhile, stood at 1.4 per cent at the end of 2008, compared to 4.2 per cent in 2007 — raising the prospect of a deflationary spiral.
Not surprisingly, public sector finances aren’t looking great. Citigroup analysts for instance, see the national deficit rising to as much as 6 per cent this year in a note out today (but before the downgrade):
As we highlighted last month, the deterioration in Spanish public finances is accelerating, and from a surplus of 2.2% in 2007 the budget deficit for 2008 will have reached 3.4%, with 6% an increasingly likely possibility for 2009. The Finance Ministry has indicated that state tax revenues may have fallen by c€35bn in 2008 (3.2% of GDP). As a result, on Jan 12 S&P put Spain on negative creditwatch for long-term debt issues.
In fact, Spain’s looking to be the worst economy in the eurozone (and that’s something given it’s competing with the UK in the Europe-as-third-world sweepstakes – see for example, the charts from Citi below). Today the European Commission has also updated its GDP forecast for 2009, now predicting the economy will shrink 1.9 per cent compared to an earlier forecast of 0.1 per cent growth.
That would be the first contraction since the euro was introduced a decade ago and, as hinted earlier, one that has the potential to further polarise the interests of the PIGS and other members.
Left on the S&P hitlist: Portugal and Ireland.
Related links:
Spain loses triple-A rating – FT
Riduzione, reduction, reduktion – FT Alphaville