S&P Downgrades Spain To AA On ‘Risks To Budgetary Position’

S&P today downgraded Spain’s credit rating one notch to “AA” from “AA+.” The outlook is negative, reflecting the possibility of another downgrade. The agency said Spain “is likely to have an extended period of subdued economic growth, which weakens its budgetary position.”

As for the reasons for Spain’s AA rating ; S&P explained:

Reuters: The downgrade primarily reflects Standard & Poor’s downward revision of its medium-term macroeconomic projections. “We now believe that the Spanish economy’s shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,” Standard & Poor’s credit analyst Marko Mrsnik said. “We now project that real GDP growth will average 0.7% annually in 2010-2016, versus our previous expectations of above 1% annually over this period.”

We have also revised our views on the GDP deflator, so that we now expect nominal GDP to regain the 2008 level by 2015; previously, we had assumed that nominal GDP would exceed the 2008 level in 2013. In addition, and while not factored into our base case, we have taken into account the possibility that Spanish public and private sector borrowing costs could remain elevated in 2010-2011 and further slow Spain’s recovery from the current recession. Our conclusion is that challenging medium-term economic conditions will further pressure Spain’s public finances, and additional measures are likely to be needed to underpin the government’s fiscal consolidation strategy and planned program of structural reforms.

We consider the main factors dampening Spain’s medium-term growth prospects to be:

– Private sector indebtedness at 178% of GDP, which in our estimation is higher than that of many of Spain’s peers;

– An inflexible labor market (we expect unemployment to reach 21% in 2010), which we believe is likely to slow the recovery of external price competitiveness;

– A fairly low export capacity–currently, Spain’s exports are close to 25% of GDP–coupled with eroded competitiveness due to past high increases in unit labor costs compared with those of its peers;

– The financial system’s asset quality, which in our opinion is under pressure as reflected in the recent revision of our Banking Industry Country Risk Assessment (BICRA) for Spain to group 3 from group 2.

The rating action sent the euro to fresh one-year lows [it touched $1.3112,] but saw a market reaction that was more muted than in the previous trading session that produced Tuesday’s 200+ point plunge — the Dow’s worst day in almost three months — when S&P downgraded Greece to “junk” status and downgraded Portugal two notches.

Text of statement released by the rating agency »

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