Spain’s Credit Rating Lowered Two Notches With Negative Outlook

Jan. 14 (Bloomberg) -- Spain’s credit rating was cut two levels by Standard & Poor’s after Prime Minister Mariano Rajoy’s government said on Dec. 30 the nation’s budget deficit will overshoot its 2011 target by a third.

S&P yesterday cut Spain’s long-term rating on its debt to A from AA-, the second downgrade by the rating agency in three months and the fourth since January 2009. Spain’s outlook was lowered to negative, S&P said in a statement released in Frankfort, indicating “at least a one-in-three chance that the rating will be lowered in 2012 or 2013.”

Spain was joined by eight other European countries, including France, Italy and Portugal, in being downgraded, with France and Austria losing their top AAA credit ratings. S&P affirmed the long-term ratings of seven others, including the Netherlands, Belgium and Ireland, in a move that leaves Germany as the eurozone’s only stable AAA credit.

“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” S&P said. Spain’s downgrade “reflects our opinion of the impact of deepening political, financial and monetary problems within the European Economic and Monetary Union (eurozone), with which Spain is closely integrated.”

The downgrade comes as European leaders return to work from Christmas holidays seeking to buy time for the Spanish and Italian governments to wrest control over their debt and rescue the single currency from fragmentation as the region’s crisis enters a new year. Spain risks becoming the latest euro nation to be overwhelmed by the sovereign-debt turmoil as its economy contracts and after the government failed to tackle its budget deficit, the euro area’s third-largest in 2010.

Spending Cuts

Rajoy’s People’s Party government, which took over from the Socialists on Dec. 22, announced 14.9 billion euros ($19.3 billion) of spending cuts and tax increases on Dec. 30 as it estimated that the 2011 budget deficit will amount to 8 percent of gross domestic product instead of the previous government’s 6 percent target. The shortfall reached 9.3 percent in 2010.

The government will need to reduce by almost half this year’s budget gap to comply with its 2012 commitment and meet an election pledge of restoring Spain’s AAA rating lost in 2009.

Spain faces the task of funding more than 30 billion euros of maturing debt in the first quarter, according to data compiled by Bloomberg.

Comprehensive Solution

S&P put 15 euro nations, including Spain, on review for a downgrade on Dec. 5, linking the final decision to the outcome of a European Union summit that ended Dec. 9 in Brussels. EU leaders, in their fifth attempt to come up with a comprehensive solution to end the debt crisis, agreed to forge a tighter fiscal union, shore up its bailout funds and tighten rules to curb future debts.

Spanish Economy Minister Luis de Guindos said on Jan. 3 that measures to reduce the country’s “significant slippage” in its budget must be “complemented with reforms to increase the potential growth of the Spanish economy.” De Guindos said on Dec. 26 he expected two “tough quarters” ahead.

Businessweek