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Spain's rating upheld as crisis eases

PAN PYLAS

Published: Tuesday, Feb. 1 2011 11:50 a.m. MST

People queue outside an unemployment office in Madrid, Tuesday Feb. 1, 2011, a day before the release of the govenment's monthy unemployment figures. There are currently nearly 4.7 million unemployed people in Spain.

Arturo Rodriguez, Associated Press

MADRID — Standard & Poor's has given Spain a welcome boost by affirming its credit rating Tuesday, in another sign that the government debt crisis that threatened to sink the euro has come off the boil, at least for the moment.

The agency said Spain's current, solid AA rating partly reflects the government's resolve to cut its deficit and enact reforms to make its struggling economy more productive.

That positive review from outsiders comes as a welcome relief for Spain's hard-pressed government and for worried European Union officials as they try to contain a crisis that has already forced Greece and Ireland to take bailout loans from their eurozone partners and the International Monetary Fund to avoid national bankruptcy

"The ratings on Spain reflect the benefits of what we view as a modern and relatively diversified economy, as well as our opinion of the government's continuing political resolve to deal with the outstanding challenges," said S&P's credit analyst Marko Mrsnik.

However, Mrsnik warned the country's rating will remain under pressure for months to come from the high level of private sector indebtedness, the economy's lax competitiveness and tough labor market conditions — unemployment in Spain remains at a painful 20 percent.

"The negative outlook reflects the possibility of a downgrade if Spain's fiscal position deviates materially, in our opinion, from the government's budgetary targets for 2011 and 2012," Mrsnik said.

S&P is forecasting that Spain's general government deficit will decline to 6.3 percent of national income in 2011 from 2010's 9.3 percent. The agency is predicting that Spain's economy will follow up the 0.2 percent contraction in 2010 with growth of 0.7 percent this year and 1.5 percent in 2012.

The sense of panic that gripped markets at the end of last and the beginning of this year has abated in recent weeks, as EU officials have raised expectations for a "comprehensive solution" to the currency union's debt crisis.

The renewed optimism has been most evident in the performance of the euro, which has risen around 10 cents since the middle of January to around $1.38. And though yields, or interest rates, on bonds from countries like Greece, Ireland, Portugal and Spain remain high, the European Central Bank felt confident enough to halt its bond purchases last week, a key lifeline that helped calm bond market jitters.

Though the debt crisis has fallen out of the headlines in recent weeks, it still is a long way from being solved.

"When you look at sovereign (bond) spreads compared to Germany nothing has changed," said Zsolt Darvas, a research fellow at Brussels-based think tank Bruegel.

Investors have taken a "wait-and-see attitude" on the comprehensive package promised by Brussels, said Darvas, and whether governments are willing to take the lid of the problems that have haunted the region since the collapse of Lehman Brothers in 2008.

There are a number of proposals being discussed. The EU's executive Commission wants governments to boost the size and powers of the eurozone's contribution to the bailout fund, the so-called European Financial Stability Facility.

In addition to raising the EFSF's lending capacity to the promised €440 billion, there are discussions to allow the EFSF to buy back bonds directly in the markets — as the ECB has been doing — and reduce the interest payments that bailed-out countries have to pay for their loans.

The Commission has also suggested allowing Greece and other financially troubled countries to use EFSF money to buy back their own bonds on the open market or from the ECB, which could reduce their overall debt obligations.

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