S and P cuts Spain rating, warns of more contraction

WASHINGTON, United States of America – Standard & Poor’s cut Spain’s sovereign debt rating Thursday, April 26, by two notches, warning that the government’s budget situation is worsening and that is likely to have to prop up its banks.

S&P cut the country’s rating to BBB-plus and added a negative outlook, saying it expected the Spanish economy to shrink both this year and next, raising more challenges for the government.

It also said that eurozone-wide polices were failing to boost confidence and stabilize capital flows, and that the region needed to find ways to directly support banks so that governments were not forced to take on those burdens themselves.

“We believe that the Kingdom of Spain’s budget trajectory will likely deteriorate against a background of economic contraction in contrast with our previous projections,” it said in a statement.

“At the same time, we see an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector.”

“As a consequence, we believe there are heightened risks that Spain’s net general government debt could rise further.”

S&P forecast that the economy would contract by 1.5% this year, instead of its previous forecast of slight growth, and predicted that the contraction will continue in 2013 by about 0.5%.

It placed a negative outlook on the new rating, a warning that it sees “significant risks” that Spain’s fiscal situation would further deteriorate and force another ratings cut.

“We think risks are rising to fiscal performance and flexibility, and to the sovereign debt burden,” it said.

It pointed to falling incomes of the Spanish people, businesses rapidly cutting their own debt rather than investing, and the government’s own tough austerity plan aimed at getting its budget in balance.

All, S&P said, will be a drag on economic growth.

The US ratings agency last cut Spain’s sovereign rating in January, by two notches to A, as worries grew that the government would be challenged to close its fiscal deficit.

Since then the Bank of Spain, helped by the European Central Bank, has become the main source of help to the government in financing its current account deficit, S&P said.

But at the same time, S&P said, Spain’s commercial banks are increasingly leaning to official sources for funds as they struggle to deal with piles of bad loans, especially in real estate.

S&P tied the problems in Spain to the overall strategy for the European sovereign debt crisis which, it said, “continues to lack effectiveness.”

“We think credit conditions, and hence the economic outlook for Spain, could now deteriorate further than we anticipated earlier this year unless offsetting eurozone policy measures are implemented to support investor confidence and stabilize capital flows with the rest of the world.”

Better measures, it said, would include authorities pooling together to a greater extent their resources and obligations, and finding ways to directly support banks so that governments like Madrid are not forced to do so. – Agence France-Presse