The ratings agency S&P has slashed Spain’s credit rating by two notches, the cut piles extra pressure onto Mariano Rajoy to request a bailout.
The credit ratings agency warned that the continued imposition of harsh austerity measures and increasing levels of unemployment are likely to intensify the level of unrest sweeping the country and could cause even deeper rifts between Spain’s regional and central governments. It warned that unless the situation doesn’t show signs of improvement then it will cut the rating even further.
S&P laid out a list of requirements for such a cut and they don’t make pretty reading, they include the decline in political support for Madrid’s agenda (already under threat from Catalonia), the Eurozone fails to stop Spain’s borrowing costs rising to unsustainable levels or if debt tops 100% of economic output. Each of these targets are going to be very difficult for Rajoy’s government to stick to.
The downgrade to BBB- from BBB+ late on Wednesday leaves Spain one notch above “junk” status. S&P also attached a “negative outlook”, which warns of a possible downgrade in the medium term.
“The downgrade reflects our view of mounting risks to Spain’s public finances, due to rising economic and political pressures,” said the rating agency in a statement.”In our view, the capacity of Spain’s political institutions (both domestic and multilateral) to deal with the severe challenges posed by the current economic and financial crisis is declining, and therefore, in accordance with our rating methodology, we have lowered the rating by two notches.”
The agency has expressed doubts that the other Eurozone members will give their full support to the attempts to recapitalise Spain’s struggling banking system, it claims that this danger will see the countries debt burden to explode.
“Against the backdrop of a deepening economic recession, we believe that the government’s resolve will be repeatedly tested by domestic constituencies that are being adversely affected by its policies,” S&P said. “Accordingly, we think the government’s room to contain the crisis has diminished.”
The Euro has weakened against a number of its major peers as a result of credit rating cut. As Spain continues to be the biggest concern for investors and worries rise that the country dithers over requesting a bailout. Spain is holding off asking for external assistance, which would if granted, pave the way for the European Central Bank to utilise its new scheme of buying bonds of struggling Eurozone states that ask for aid to help reduce their borrowing costs.
As of 10.40am:
The Pound to Euro exchange rate is currently trading at 1.2432
The Pound to US Dollar exchange rate is currently trading at 1.6019
The Pound to Australian Dollar exchange rate is currently trading at 1.5580
The Euro to US Dollar exchange rate is currently trading at 1.2886
The Euro to Pound exchange rate is currently trading at 0.8044
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