Fitch Ratings strips Spain of one its A’s by downgrading the country’s long term credit rating to AA+, from AAA. Fitch anticipates that the economic adjustment process in Spain will be more difficult and prolonged than for other economies. Here’s the full rating report from Fitch.
“Fitch believes the Spanish government could find it hard to implement some of the expenditure cuts. In particular, the agency has some doubts over the feasibility of the cuts that need to be made by Spain’s autonomous communities.”
“The downgrade reflects Fitch’s assessment that 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,” the rating agency writes in its special report on the Spanish economy.
Fitch Ratings downgraded Spain’s Long‐Term Foreign‐ and Local‐Currency Issuer Default Ratings (IDRs) to ‘AA+’ from ‘AAA’ on 28 May 2010.
Despite these expectations, the Stable Outlook on Spain’s sovereign rating reflects Fitch’s view that the country’s credit profile will remain very strong and consistent with its ‘AA+’ rating, even in the event of some slippage relative to official fiscal targets, Fitch analysts says.
The Spanish government has announced an ambitious fiscal consolidation plan to ensure a return to sustainable public finances after the global financial crisis.
Fitch believes the Spanish government could find it hard to implement some of the expenditure cuts. In particular, the agency has some doubts over the feasibility of the cuts that need to be made by Spain’s autonomous communities, who may also see a reduction in the transfers they will receive from the state budget.
“Nevertheless, Fitch believes the risk that economic growth will fall short of the government’s projections is a more important consideration. The Spanish government is forecasting a sharp recovery in private consumption and investment. Fitch believes that Spain’s unemployment rate, the legacy of its construction boom, and its high level of indebtedness will weigh on private consumption and investment in the medium term.”
Consequently, Fitch is forecasting weaker growth for the Spanish economy in the medium term than the government is, although the agency’s projections on the contribution of net trade to growth in the medium term are slightly more optimistic than those of the government, the report says.
“Slightly” More Pessimistic
Anyway – the rating agency have trouble seeing how the Spanish government will be able to meet its growth projections for the next decade.
I’m not sure if I would call a difference in the GDP projections of 1,2 – 1,3 percentage points (about 35%) for “slightly” lower, but that not the biggest issue here.
Latest: U.S. stock market takes another beating after the news about the downgrade of Spain. Stocks currently down between 2,5 and 3,8 percent.
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