WTF !! SPAIN IS TOAST !! FITCH DOWNGRADES SPAIN'S CREDIT RATING !!

[link to www.ft.com]


Fitch downgrades Spain’s credit rating
By Victor Mallet in Madrid and Jennifer Hughes in London

Published: May 28 2010 19:06 | Last updated: May 28 2010 19:06

Fitch, the credit rating agency, on Friday downgraded Spain’s sovereign debt because of its sluggish economic growth outlook, immediately pushing down the euro and world stock markets amid doubts about the prospects for weaker southern European economies.

In New York, the S&P 500 dropped 1.1 per cent on the news but recovered some of its losses to reach 1,092.65 in early afternoon trading, down 0.7 per cent on its level before Fitch’s announcement and off 1 per cent on the day.

EDITOR’S CHOICE
Spain to toughen short-selling rules - May-28Dollar suffers as risk appetite returns - May-28Wall Street dips in low volume trade - May-28FTSE gives back early gains - May-28Spyker boosted by partnership talks for new car - May-28Three-day rally restores confidence - May-28With European markets already closed, the euro bore the brunt of European selling, falling almost a whole cent against the dollar in minutes before regaining about half its losses to trade at $1.232.

The reaction was made sharper by the fact the news landed just as many European traders had left for a long holiday weekend, thinning trading conditions further.

The Fitch announcement followed a similar move a month ago by Standard & Poor’s, which also downgraded Greece and Portugal. Moody’s, a third rating agency, has so far kept Spain at its highest level.

Fitch said it had downgraded Spain’s long-term foreign and local currency ratings by one notch to AA+ from triple-A, a step that is likely to increase the cost to Spain of raising new debt and rolling over previous loans on the bond markets.

“The downgrade reflects Fitch’s assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium term,“ Brian Coulton of Fitch was quoted as saying in a statement.

Spain and other eurozone economies are struggling to reconcile the need to cut budget deficits, in order to reassure investors that they are bringing their public finances under control, with the equally important aim of restoring economic growth after a long recession.

On Thursday, Spain’s Socialist government narrowly won a parliamentary vote to enact its latest austerity plan, involving €15bn of budget cuts through a 5 per cent cut in public sector pay, a freeze on pensions and reduced government investment.

The target is to cut the budget deficit from 11.2 per cent of gross domestic product in 2009 to 6 per cent in 2011 and 3 per cent in 2013.

Acknowledging the likely negative impact of austerity, Elena Salgado, Spanish finance minister, on Friday reduced the government’s economic growth forecasts for future years, although some economists still regard Spain’s official predictions as over-optimistic.

The new Spanish forecast puts growth at 2.5 per cent in 2012, down from an earlier figure of 2.9 per cent, and at 2.7 per cent in 2013, down from 3.1 per cent. The government had already cut its 2011 growth forecast from 1.8 per cent to 1.3 per cent. It expects the economy to shrink slightly this year.

Fitch’s forecasts for Spanish growth are considerably lower – it predicts only 0.5 per cent growth next year, for example.

Justifying its downgrade, Fitch said it believed the Spanish government could find it hard to implement some of the spending cuts it had announced, particularly since some decisions lie in the hands of the country’s 17 autonomous regions.

Spanish trade union federations have announced a public sector strike for June 8, and some union leaders say they want to call a nationwide general strike on that day. They are also resisting the radical reforms to the rigid Spanish labour market that employers and most economists say are necessary to ensure long term growth and improved competitiveness.

Win Thin, currency strategist at Brown Brothers Harriman, said the downgrade “should serve as a reminder that while the news stream out of Europe was generally quiet this week, the potential and risk is for more bad news to emerge from time to time and roil markets.”

Analysts criticized the timing of the Fitch release. Similar, end-of-day announcements last month on Spain and Greece from rival agency S&P also caused turmoil in the markets and drew anger from traders who said the thin conditions exacerbated market moves.

Sean Increnoma, strategist at 4Cast, a consultancy, said pointedly: “Liquidity at this stage, after most of Europe has shut down, is not going to help. Well timed!”
Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web