This is bad news for Spain, and I wouldn't be suprised if the U.K were not the next country to lose their AAA rating too.

S&P trims Spain’s rating as euro slides

By Victor Mallet in Madrid and David Oakley in London
Published: January 19 2009 20:48 | Last updated: January 19 2009 20:48

Spain became the first country to lose its triple A credit rating from Standard & Poor’s since Japan in 2001, spurring a slide in the euro as the economic outlook for Europe worsened.
S&P said it had downgraded Spain’s long-term sovereign debt because of its deteriorating public finances.

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The decision, which is likely to increase borrowing costs for the Madrid government and for Spanish companies, highlighted strains within the eurozone between its relatively robust northern economies and those in the south – Spain, Portugal, Italy and Greece – that would benefit more from a devaluation of the single currency.
The euro fell against the dollar and the yen, while the spread in bond yields between Spain and Germany, Europe’s biggest economy, widened to record levels. The cost of insuring Spanish government bonds against default through credit default swaps also rose to a record high, with investors concluding that Spanish assets had become riskier.
S&P lowered its rating by one notch to double A plus, arguing that the global economic crisis had highlighted “structural weaknesses” in the Spanish economy that were inconsistent with triple A, the highest rating.
Fitch, another rating agency, maintained Spain at triple A on Monday, arguing that the modest level of total government debt gave the country enough “headroom” to absorb the fiscal shock of crisis-related spending.
Spain is the first triple A rated nation to be downgraded by S&P since the global financial crisis erupted.
It is also the second eurozone country to suffer a downgrade in the past week. Greece had its A rating, which is five notches below triple, dropped to A minus last Wednesday. Portugal and Ireland are at risk of being downgraded.
Recession is casting a shadow over the continent. The European Commission on Monday issued revised economic forecasts showing European Union gross domestic product would contract by 1.8 per cent this year, faster than in the US. Spain and Ireland would contract by 2 per cent and 5 per cent. German GDP was expected to fall by 2.3 per cent and the UK’s by 2.8 per cent.
In a statement, S&P said the Spanish downgrade reflected its belief “that public finances will suffer in tandem with the expected decline in Spain’s growth prospects, and that the policy response may be insufficient to effectively counter the related economic and fiscal challenges”.
As part of the eurozone, Spain has no independent monetary or exchange rate policy and therefore cannot see its currency devalued, unlike the UK. Eurozone membership thus protected Spain from exchange rate crises, said S&P, but “also puts greater onus on microeconomic and fiscal policies”.
Spain has embarked on a heavy government spending programme to counter a deepening recession, and expects a budget deficit this year of 5.8 per cent of GDP, nearly twice the level it was predicting only a month ago.
The European Commission predicts the Spanish deficit will reach 6.2 per cent of GDP and S&P made a deficit forecast of 6.6 per cent.
Pedro Solbes, finance minister, has noted that Spain attained triple A status only at the end of 2004. On Monday he played down the significance of S&P’s decision, arguing that the new, lower rating was still “quite positive”.

Copyright The Financial Times Limited 2009

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