One More Sovereign Downgrade, This Time Around Its Spain!
Standard & Poor's Ratings Services lowered its outlook on Spain to negative, saying the country will likely see "significantly lower" gross-domestic-product growth.
Its long-term ratings are one notch below AAA and the outlook change comes as Spain deals with surging unemployment following the recession. It was 19.3% in October, the second highest in the European Union behind Latvia.
Formerly an engine of euro-zone job creation and economic growth, Spain last year suffered an abrupt reversal of fortune when the global financial crisis precipitated the collapse of the country's formerly buoyant construction industry. Though the wider euro zone returned to growth in the third quarter, the Spanish economy continued to contract. Spanish officials have said they expect Spain to return to growth in the first quarter.
In addition, S&P Wednesday noted Spain's "persistently high fiscal deficits relative to peers" in the absence of policy that emphasizes medium-term growth.
"Compared to its rated peers, we believe that Spain faces a prolonged period of below-par economic performance, with trend (gross-domestic-product) growth below 1% annually, due to high private sector indebtedness and an inflexible labor market," S&P added.
The ratings agency said a downgrade could come in the next two years if authorities don't take action to tackle fiscal and external imbalances. "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," said analyst Trevor Cullinan.
In just one month we have witnessed 3 major downgrades by global credit rating agencies, first it was Dubai, then Greece and now Spain. These are not so small economies that it won't hurt the sentiment, slowly it is becoming like a house of cards, one falls and the whole house collapses.