Fitch Downgrades Spain’s Credit Rating as Europe Battles Debt Crisis

May 29 (Bloomberg) — Spain lost its AAA credit grade at Fitch Ratings as Europe battles a debt crisis that’s prompted policy makers to forge an almost $1 trillion bailout package for the region’s weakest economies.

The ratings company cut the grade one step yesterday to AA+ and assigned it a “stable” outlook, according to a statement from London. Spain has held the top rating at Fitch since 2003. Standard & Poor’s lowered Spain’s ratings to AA on April 28.

“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, Fitch’s head of Europe, Middle East and Africa sovereign ratings in London, said in the statement.

Spain is struggling to cut the euro region’s third-largest budget deficit as the economy, still reeling from the collapse of a debt-fueled construction boom, is forecast to contract for a second full year. Prime Minister Jose Luis Rodriguez Zapatero, who has angered traditional allies by cutting public wages and freezing pensions, has failed to convince investors he can put the finances back in order as borrowing costs continue to surge.

U.S. stocks fell after Fitch’s announcement and the euro weakened to $1.2280. The currency used by 16 European nations has slumped 19 percent against the dollar in the past six months on concern that indebted countries won’t be able to rein in their spending.

‘Still a High Rating’

“I would like to emphasize that it’s still a high rating,” Soledad Nunez, the director of Spain’s Treasury, said in a telephone interview. “The agency recognizes that public finances are strong and the government’s commitment to fiscal reform.”

The Treasury, which faces a 16.2 billion-euro bond redemption in July, has completed about 40 percent of its funding program for this year, Nunez said.

Fitch announced the credit rating downgrade after markets closed yesterday.

Earlier in the day, the extra yield investors demand to hold Spanish 10-year bonds rather than German equivalents rose to 153 basis points from 152 basis points on May 27. The spread compares with an average of 23 basis points over the last decade and is just 10 basis points below the level before the EU created a financial backstop for the weakest euro members.

That facility, providing as much as 750 billion euros ($925 billion), was created on May 10 and coincided with the European Central Bank’s announcement that it would start buying government bonds.

Deeper Cuts

In return, Spain agreed to deeper spending cuts that would slash the deficit to 6 percent of gross domestic product in 2011 from 11.2 percent last year. Parliament approved those measures on May 27 by a single vote, signaling Zapatero may struggle to achieve support for the 2011 budget.

“The Spanish government had been in denial from 2008 to early 2010 about the magnitude of the crisis so now you have consequences,” said Raphael Gallardo, who helps manage 500 billion euros ($615 billion) as chief economist at Axa Investment Managers in Paris. “Now with the acceleration of austerity measures, like the shocking cut to civil servant wages, they finally got real and measured the severity of the crisis.”

The austerity program, which won applause from the International Monetary Fund, will undermine the recovery, Finance Minister Elena Salgado said on May 20 as she cut her forecast for Spanish growth next year to 1.3 percent from 1.8 percent. The government predicts a 0.3 percent contraction this year.

Fitch’s move follows Standard & Poor’s decision to cut its rating on Spain twice since the start of 2009. Moody’s Investors Service retains an Aaa rating. Spain’s debt burden as a proportion of GDP was 53 percent last year, lower than Germany, France and the euro-region average.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

Last Updated: May 28, 2010 19:00 EDT
By Esteban Duarte and Emma Ross-Thomas

Source: Bloomberg

See also:

France’s Europe Minister Pierre Lellouche: Eurozone Bailout Violates EU Laws

Greek Bailout: Two Secret Exit Clauses – Why Europe Is Now Cheering For Its Own Demise

Germany: Parliament Votes to Give 66 % of Annual Income Tax Revenue to The Banksters

Greek Central Bank Accused of Encouraging Naked Short Selling of Greek Bonds

ECB Resorts to ‘Nuclear Option,’ Intervenes in Bond Market to Fight Euro Crisis

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