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Spain downgraded

May 29, 2010

Ratings agency Fitch cut Spain's credit rating due to weak growth prospects, dealing a blow to efforts to rein in spending and ease fears of a Greek-style crisis. US stocks slid and the euro weakened on the news.

https://p.dw.com/p/NcR3
Fitch building in new york
Fitch says Spain's economic recovery wont be as robust as Madrid has predictedImage: DW / Sonja Kanikova

The euro weakened against the dollar and stocks slumped further on the US markets as the news emerged Friday that the ratings agency Fitch had downgraded Spain's credit rating from the maximum AAA to AA+.

Fitch said the "process of reducing private sector and external debt will reduce the growth rate of the Spanish economy."

The move comes as Spain's Socialist government, under pressure from its European Union partners and international markets, has approved tough and unpopular austerity measures to shore up its public finances.

The government hopes to slash the public deficit to the eurozone limit of three percent of gross domestic product by 2013 from the massive 11.2 percent last year.

Spain's two biggest labor unions have said they plan to protest the austerity measures.

Cutting back

Fitch warned that Spain's economic recovery will be more difficult than other AAA-rated countries, which was why it moved to lower the credit rating.

EU Commisisoner for Economic Affairs, Olli Rehn (l), with Spanish Finance Minister Elena Salgado at a meeting in Brussels
Spain's finance minister Salgado (r) has said Spain is not Greece, bur ratings agencies are not so sureImage: AP

"The inflexibility of the labor market and the restructuring of regional and local savings banks will hinder the pace of adjustment," Fitch said.

Another ratings agency, Stand and Poor's, lowered Spain's credit rating a month ago to AA from AA+, citing a negative outlook for Spanish growth prospects.

Spain's treasury chief, Soledad Nunez, reacted to the downgrade by emphasizing that the country's rating still remained high, falling from a mark of "distinction to outstanding."

Market reaction

The news of Spain's demotion renewed investors' fears that European countries like Greece, Spain and Portugal's attempts to reduce their debt loads may undercut the region's economy and spread weakness to other areas.

The news of Spain's downgrade arrived too late to impact the European markets, but in New York, the Dow Jones Industrial Average slid 122.36 points (1.19 percent) to finish at 10,136.63 ahead of a long holiday weekend.

The US dollar also shot up against the euro, trading at $1.22 per euro.

"Fitch's downgrade of Spain reignited traders' worst eurozone fears," Elizabeth Harrow of Shcaeffer's Investment Research told AFP.

gb/sh/dpa/AP/AFP
Editor: Kyle James