The ratings agency has downgraded Spain from ‘AA+’ after a reassessment of its macro economy. It says the move away from a credit-fuelled economic growth will mean Spain struggles to keep its public finances in check.
This comes after S&P downgraded Portugal yesterday, as well as reducing Greek sovereign debt to junk status.
S&P credit analyst Marko Mrsnik says “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. We now project that real GDP growth will average 0.7 per cent annually until 2016, versus our previous expectations of above 1 per cent annually over this period.”
The news had led to further drops in the Euro, which has fallen to 0.868 again the Pound and 1.320 against the Dollar.
Markets fell after the S&P announcement also – the FTSE dropped 0.3 per cent, the French CAC 40 dropped 1.5 per cent and the German DAX was down 1.22 per cent.
Spain’s private sector indebtedness is at 178 per cent GDP, which S&P says is higher than most of its peers. It is also suffering from unemployment rises, which S&P says will reach 21 per cent this year.
Spain must also suffer an unwinding of its government’s fiscal stimulus as part of its current strategy to reduce the general government deficit to 3 per cent GDP by 2013, down from 9.8 per cent GDP this year. S&P says Spain’s plans are unattainable as it will still have a deficit of more than 5 per cent in three years.
S&P says: “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.”