Spain has vowed to defy predictions of a deep recession next year after a credit rating downgrade left its debt hovering above junk-bond status and jolted world markets.
Standard & Poor’s sliced the nation’s rating late on Wednesday, citing a deepening recession with one-quarter of workers unemployed, mass protests, and growing political friction between Madrid and the debt-struck regions.
Further clouding the outlook were doubts about the eurozone’s commitment to share the cost of salvaging Spain’s stricken banks, a bill that could send Spanish sovereign debt soaring, it said.
The New York-based agency, which tips a drop in Spanish economic output of 1.4 per cent in 2013, criticised the government’s “overly optimistic” budget forecast for a contraction of just 0.5 per cent.
As a result it cut Spain’s rating two notches to BBB- from BBB+, leaving it just one level above “speculative” or “junk” grade debt, and left it with a negative outlook.
Financial markets view the Spanish 2013 budget forecast with deep scepticism. Even the International Monetary Fund this week predicted the Spanish economy would shrink 1.3 per cent next year.
“What we want is to refute these forecasts through the action of the government,” said the Spanish secretary of state for the European Union, Inigo Mendez de Vigo, on Thursday.
“We believe that the state budget that we presented and that will be approved by parliament complies with the deficit targets we have to meet with the European Union,” he added.
De Vigo defended a battery of economic reforms passed by Prime Minister Mariano Rajoy’s right-leaning government, which has shaken up labour laws and forced banks to bolster balance sheets.
“We believe these are the measures that have to be taken at this time to move forward,” the policymaker said.
“We will see if these forecasts become reality,” he added.
“We are going to fight so this reality does not come about.”
The downgrade of the Spanish sovereign rating hurt financial markets worldwide.
The euro fell to $1.2869 in morning European trade from $1.2887 in New York late Wednesday.
New York’s Dow Jones industrials average fell 0.95 per cent, major Asian markets retreated and European markets fell in opening trade, with London’s benchmark FTSE 100 index down 0.14 per cent and Madrid’s IBEX-35 easing 0.81 per cent to 7,606.0.
The interest rate on Spanish government 10-year bonds edged up to 5.865 per cent from 5.804 per cent at the previous close.
More worrying, perhaps, Spain is awaiting the verdict of Moody’s Investors Service, which has already lowered the sovereign rating to one notch above junk bond status and may downgrade it again.
If Spain’s sovereign debt is rated as junk, it could trigger a flight of investors, sending borrowing rates soaring and accelerating the timetable for any sovereign rescue.
Moody’s has promised to announce the results of a review of Spain’s finances for a possible downgrade this month.
