Ratings agency turns heat on Spain with further cut

SPAIN’S credit rating was cut yesterday by another agency, sending the euro briefly lower and underlining the challenges to the G20 nations over the eurozone debt crisis.

Standard & Poor’s move was triggered by the country’s 21 per cent unemployment rate, tightening credit and high private-sector debt.

It cut Spain’s long-term rating to AA- from AA, mirroring that made by fellow ratings agency Fitch last week.

In a statement, S&P said: “Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain’s growth prospects due to high unemployment, tighter financial conditions, the still high level of private-sector debt, and the likely economic slowdown in Spain’s main trading partners.”

The agency also noted the “incomplete state” of labour market reform and the likelihood of further asset deterioration for Spain’s banks.

S&P downgraded its forecast for Spanish economic growth in 2012 to about 1 per cent, from the 1 . 5 per cent it forecast in February this year.

High yields on Spanish government bonds point to concerns it could be the next eurozone economy to require a Greece-style bail-out.

Despite an unpopular austerity programme, doubts remain that Spain will meet its deficit target of 6 per cent of gross domestic product (GDP) this year.

A senior Spanish government official said that meeting the 6 per cent deficit target would be “difficult”.

However, Spain’s economy minister, Elena Salgado, said yesterday there would be some margin for manoeuvre this year thanks to about €2 billion raised by an auction of wireless frequencies and lower interest payments.

She added: “Interest payments by the central government will be at least €2bn below budget. So the combined effect of the spectrum auction and lower interest payments will mean we have a margin of 0.4 per cent [of GDP].”

Spanish unemployment is the highest in the European Union, reflecting a stagnant economy, the collapse of a decade-long housing boom and cuts aimed at taming a public sector deficit that reached 11.1 per cent of GDP in 2009.

The decision to shelve multi-billion-euro privatisation plans, mainly due to tough market conditions, has meanwhile deprived the state of much needed revenues.