Concerns about the stability of Spain’s economy have been brought once again into the spotlight, as ratings agency, Standard & Poor’s, downgraded the country’s credit status.
Unable to justify allowing the debt-swept nation to hang on to its A grade ranking, S&P has pushed Spain down by not just one, but two notches, due to fears about the country’s ability to overturn its deficit.
Many countries in the eurozone have been warned to expect a likely downgrade in the next 12-18 months, but the move to slash Spain’s position has come sooner than expected. However, S & P have expressed serious concerns about the position in the country and are worried that the situation is likely to deteriorate in the near future, hence the move.
Spain has one of the largest economies in the eurozone and a total collapse would bring unthinkable consequences for the other nations; simply handing it a bail-out package in a similar way to Ireland, Greece and Portugal, would simply not be possible.
The country has already suffered the humiliation of a downgrade just two months ago, when Moody’s slashed its rating by two notches because of what it viewed as a negative outlook in Spain.
S&P now agree and have also placed it on negative outlook, which means that another downgrade could be in the offing very shortly.
Despite the downgrades, Spain is currently still holding an investment quality ranking, unlike other countries such as Greece, which is classed as in a ‘junk status.’ But the drop in its rating could mean that Spain has to pay more to borrow money, because investors will view a loan as a greater risk.
S&P have warned that it expects Spain’s debt to grow larger because the economy in the country is currently shrinking. The central bank in Spain has admitted this is the case, as the country slipped into its second recession in just three years. The already unsustainable level of unemployment, which has reached 23%, is expected to climb even higher. Just four years ago unemployment stood at less than half the current rate, at just 9%, whilst now one in two Spaniards under the age of 25 is without a job.
The credit agency also expressed its concerns that the banking sector in the country will also need financial help from the government, adding further pressure to the overstretched public purse.
S&P has predicted that the Spanish economy will contract by 1.5% by the end of 2012 and a further 0.5% next year. It had previously forecast growth of 0.3% and 1% in 2012 and 2013, respectively.
Mariano Rajoy, the Prime Minister of Spain, has committed to a series of austerity measures he was being pushed on by finance ministers within the EU, keen to see the country get control of their economy. And whilst many of the measures are unpopular amongst the people, S&P have said that the steps taken by the Spanish government, should, ultimately, help to ease the problems.
In recent weeks, there has been a rise in mood against the Spanish government who have only been in office for 5 months. Tens of thousands of workers protested last weekend about the austerity cuts which have taken their toll on both health and education, pleading with the government to make savings elsewhere in their budget. Workers said that they had the ‘right to fight’ for the public systems of both education and health.
However, Prime Minister Rajoy is unrepentant and has said that given the dreadful state of the economy which the current government inherited, the ‘least they could do now is shut up.’