S&P's rating cut raises pressure on Spain
Source: Agencies |
October 12, 2012, Friday
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Print Edition
Print Edition
THE Spanish government's dilemma over whether to request a European bailout has become more acute following a downgrade of the cash-strapped country's credit rating.
Standard & Poor's has cut its rating on Spain's debt by two notches to BBB-, just a step above junk status, or non-investment grade. That could make it more expensive for the Spanish government to borrow money as it might scare some of its bond investors away.
The agency said it was concerned by the deepening economic recession, which has seen unemployment rise to nearly one in four and fueled social discontent. It also noted that the government's hesitation in requesting a European financial lifeline was "potentially raising the risks to Spain's rating."
Though S&P's warning may nudge the Spanish government to make a bailout request sooner rather than later, rival agency Moody's has indicated it may cut its rating for Spain in the event of a bailout request.
"It would appear that when it comes to the rating Spain is a bit between a rock and a hard place," said Gary Jenkins, managing director of Swordfish Research.
The Spanish government said the downgrade was unjustified but argued that it would have little, if any effect, on its plans to raise money in the money markets.
"The evaluation by Standard and Poor's caught us by surprise," Spain deputy Economy Minister Fernando Jimenez Latorre said yesterday. "We don't agree with its reasons."
Madrid's IBEX was the only major European stock index to drop yesterday, albeit by a modest 0.2 percent.
The yield on the country's 10-year bond was more or less unchanged, just below 5.8 percent, as investors weighed up whether the country would tap a new facility from the European Central Bank.
Last month, the ECB announced a new scheme to maintain a lid on the borrowing costs of indebted countries like Spain. It said it would buy unlimited amounts of debt of struggling European countries. However, the governments first need to apply for a eurozone bailout and so far Spain's government has balked at the prospect.
Instead, the government led by Prime Minister Mariano Rajoy has introduced a series of austerity and labor measures in a bid to bring down its deficit and convince investors it can manage its finances without outside help.
Standard & Poor's has cut its rating on Spain's debt by two notches to BBB-, just a step above junk status, or non-investment grade. That could make it more expensive for the Spanish government to borrow money as it might scare some of its bond investors away.
The agency said it was concerned by the deepening economic recession, which has seen unemployment rise to nearly one in four and fueled social discontent. It also noted that the government's hesitation in requesting a European financial lifeline was "potentially raising the risks to Spain's rating."
Though S&P's warning may nudge the Spanish government to make a bailout request sooner rather than later, rival agency Moody's has indicated it may cut its rating for Spain in the event of a bailout request.
"It would appear that when it comes to the rating Spain is a bit between a rock and a hard place," said Gary Jenkins, managing director of Swordfish Research.
The Spanish government said the downgrade was unjustified but argued that it would have little, if any effect, on its plans to raise money in the money markets.
"The evaluation by Standard and Poor's caught us by surprise," Spain deputy Economy Minister Fernando Jimenez Latorre said yesterday. "We don't agree with its reasons."
Madrid's IBEX was the only major European stock index to drop yesterday, albeit by a modest 0.2 percent.
The yield on the country's 10-year bond was more or less unchanged, just below 5.8 percent, as investors weighed up whether the country would tap a new facility from the European Central Bank.
Last month, the ECB announced a new scheme to maintain a lid on the borrowing costs of indebted countries like Spain. It said it would buy unlimited amounts of debt of struggling European countries. However, the governments first need to apply for a eurozone bailout and so far Spain's government has balked at the prospect.
Instead, the government led by Prime Minister Mariano Rajoy has introduced a series of austerity and labor measures in a bid to bring down its deficit and convince investors it can manage its finances without outside help.
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