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Spanish stocks slump after S&P credit downgrade

Video by Sarah MORRIS


Latest update : 2010-04-28

Spain's stock market closed down 2.99 percent Wednesday after ratings agency Standard & Poor's cut the country's credit rating to AA from AA+, warning it could face another downgrade.

AFP - Standard & Poor's cut the credit rating of Spain on Wednesday, one day after the ratings agency sent shockwaves through the markets by downgrading Greece and Portugal over debt concerns.

S&P said it lowered Spain's long-term sovereign credit rating by one notch to "AA" from "AA+" because the country was "likely to have an extended period of subdued economic growth, which weakens its budgetary position."

The agency said its outlook for Spain was negative and the country could face another downgrade in a statement that sent the euro plunging to a one-year low against the dollar.

"The negative outlook reflects the possibility of a downgrade if Spain's budgetary position underperforms to a greater extent than we currently anticipate," it said.

S&P downgraded Greece's bonds to junk status on Tuesday and cut Portugal's long-term credit rating by two notches, causing the markets to plunge on fears that the debt debacle in Athens was spreading to other eurozone countries.

The euro sank to 1.3128 dollars on Wednesday, reaching a level last seen in late April 2009. Major European stock markets also fell again, with shares in Madrid plunging by 2.99 percent.

"The downgrade of Spanish government debt by S&P is another alarming sign that the effects of the Greek crisis are spreading," said Ben May, European economist at market research firm Capital Economics.

S&P revised down its average estimate for annual real GDP growth in Spain between 2010-2016 to 0.7 percent from 1.0 percent.

"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," said S&P credit analyst Marko Mrsnik.

Spain's borrowing costs could remain elevated through 2011 and further slow its recovery from recession, the agency said.

"Our conclusion is that 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 programme of structural reforms," the statement said.

S&P said the main factors affecting Spain's medium-term growth prospects include private sector indebtedness at 178 percent of GDP, an inflexible labour market with unemployment expected to reach 21 percent in 2010 and a "fairly low" export capacity.

Another factor is the unwinding of fiscal stimulus measures as part of the government's efforts to cut the deficit to the European Union limit of 3.0 percent of output by 2013.

The agency said it still believed that the Socialist government could meet its target of reducing the deficit to 9.8 percent this year from 11.2 percent in 2009.

But it projected a deficit exceeding five percent in 2013, much higher than the government's target.

"Consequently, we estimate that gross government debt is likely to rise above 85 percent of GDP in 2013 and continue to trend higher until the middle of the decade," S&P said.

The agency said it could revise its outlook to stable "if the government meets or exceeds its fiscal objectives in 2010 and 2011 and Spain's economic growth prospects prove to be more buoyant than we currently envisage."

Date created : 2010-04-28


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