Après l’Islande, le déluge
Not to be outdone by its rivals at Fitch, who on Tuesday downgraded the sovereign rating of the Hellenic Republic of Greece, Standard & Poor’s on Wednesday revised its outlook on the Kingdom of Spain to negative from stable.
From the statement:
* We are revising the outlook on the Kingdom of Spain to negative from stable, and affirming the ‘AA+’ long-term and ‘A-1+’ short-term sovereign credit ratings.
* Compared to our expectations when we lowered our rating on the sovereign in January 2009, we now believe that Spain will experience a more pronounced and persistent deterioration in its public finances and a more prolonged period of economic weakness versus its peers.
* In our opinion, reducing Spain’s sizable fiscal and economic imbalances requires strong policy actions, which have not yet materialized.
Rationale, emphasis ours:
The change in the outlook stems from our expectation of significantly lower GDP growth and persistently high fiscal deficits relative to peers over the medium term, in the absence of more aggressive fiscal consolidation efforts and a stronger policy focus on enhancing medium-term growth prospects.
The ratings on Spain reflect our view on its modern and relatively diversified economy and its manageable though fast-increasing general government debt burden projected at 67% of GDP in 2010. The ratings also benefit from Spain’s membership of the Eurozone, which we believe provides the economy with monetary and exchange rate stability and has insulated the country from some of the pressures stemming from the recent global financial turmoil.
Compared to its rated peers, we believe that Spain faces a prolonged period of below-par economic performance, with trend GDP growth below 1% annually, due to high private sector indebtedness (177% of GDP in 2009) and an inflexible labor market. These factors, in turn, suggest to us that deflationary pressures could be more persistent in Spain than in most other Eurozone sovereigns, which we expect would further slow the pace of fiscal consolidation in the medium term.
Rapid credit growth and large current account deficits, averaging 9.5% of GDP in the three years to 2008, highlight to us that the Spanish economy had been overheating for some time before it entered recession. At the same time, we see that Spain has built up a sizable net external liability position with the rest of the world, at 224% of current account receipts in 2008, similar to that in lower-rated Portugal (A+/Negative/A-1; 204%) and Greece (A-/Watch Neg/A-2; 254%).
…
The negative outlook reflects the risk of a downgrade within the next two years in the absence of more aggressive actions by the authorities to tackle fiscal and external imbalances. However, given the relatively strong starting position of the public finances, we believe that there is time for the government to forge a political consensus supporting a credible fiscal consolidation that is consistent with the current rating. If the government announces concrete fiscal measures that we believe could credibly achieve annual primary surpluses of 2% or higher by the end of the forecast period in 2012, downward pressure on the ratings may abate.
According to Reuters, Spain was less than pleased with S&P’s move:
*SPANISH FINANCE MINISTRY OFFICIAL COMMENTS IN INTERVIEW
*SPAIN DOESN’T AGREE WITH S&P OUTLOOK CHANGE, OFFICIAL SAYS
Related links:
Fitch downgrades Mexico – FT Alphaville
Russia downgrade first of many? – FT Alphaville
Sovereign downgrades: some perspectives – FT Alphaville
So begin the (serious) sovereign downgrades…? – FT Alphaville