Downgrade hits Spain in crisis

MADRID

People stand in line to enter a government employment office in Madrid April 27. Spain’s sickly economy faces a deepening crisis as S&P’s downgrades the country’s soverign credit rating and unemployment surges. REUTERS photo

The international ratings agency Standard & Poor’s (S&P) became the first of three leading credit rating agencies to strip Spain of an A rating Late April 26. It cited a worsening in Spain’s budget deficit and poor economic prospects for its decision to reduce the rating by two notches from A to BBB+.

Spain has become the epicenter Europe’s debt crisis in recent weeks as investors worry over its ability to push through austerity and reforms at a time of recession and mass unemployment.

The decision by S&P’s to cut Spain’s credit rating has weighed on European markets April 27, reinforcing fears that the country’s new government faces an uphill battle to get a grip on its finances.
The Stoxx 50 index of European shares fell 0.7 percent while the euro dropped 0.35 percent against the dollar to 1.3162 after the downgrade.

Benchmark oil for June delivery was down 67 cents to $103.88 a barrel at late afternoon April 27 Singapore time in electronic trading on the New York Mercantile Exchange. Brent crude for June delivery was down 49 cents at $119.43 per barrel in London.

The agency also lowered Spain’s short-term rating and assigned a negative outlook, which suggests the possibility of another downgrade in the near future.

Spain’s credit rating is still in investment grade, three notches above junk status. Nonetheless, the lower rating could increase the nation’s borrowing costs because investors will likely demand higher interest rates to compensate for the greater risk implied by the downgrade.

To go along with the credit downgrade, S&P lowered its forecast for Spain’s economy. The agency said it expects the economy to contract by 1.5 percent this year and 0.5 percent in 2013. Its previous outlook had growth of 0.3 percent in 2012 and 1 percent in 2013. Spain’s new conservative government has forecast that the economy will contract 1.7 percent this year.

EU criticism
S&P had harsh words for Europe’s handling of the debt crisis, which it said “continues to lack effectiveness.” It said that Spain’s situation could deteriorate further unless Europe takes steps to bolster investor confidence and stabilize capital flows with the rest of the world. It suggested more pooling of resources and obligations and policies to better coordinate wages among European countries.

The Spanish government has announced a raft of reforms since being sworn in, including ones to make Spain’s rigid labor market more flexible, strengthen its banking sector or prevent overspending in its highly devolved regions.

Spain spooked debt markets last month by unilaterally announcing a more modest budget deficit target. It has since agreed with the European Union to reach 5.3 percent of Gross Domestic Product this year and 3 percent by 2013, down from 8.5 percent of GDP in 2011. But most economists view the task as being just impossible to achieve.

Jobless rate soars
Spain’s jobless rate surged to a record at the end of March as 5.6 million people searched for work in a recession-bound, deficit-plagued economy, data showed April 27. The unemployment rate soared to 24.44 percent of the potential workforce at the end of March from 22.85 percent three months earlier, the National Statistics Institute report showed hours after S&P downgraded Spain’s sovereign debt.
Already, Spain had the highest unemployment ratio in the industrialized world, as the slumping economy failed to absorb the millions of workers cast out of jobs when a property bubble imploded in 2008.

Compiled from AFP, AP and Reuters reports by the Daily News staff in Istanbul.