New downgrade for Spanish debt

A
second agency has downgraded Spain’s credit rating, citing the country’s poor
growth prospects.

Fitch cut Spain’s rating from the
maximum AAA to AA+.

Standard & Poor’s took the same
step a month ago but Fitch’s move is a fresh blow to the government which wants
to ease market fears about its economy.

Over the weekend, six regional
Spanish savings banks have said they were negotiating alliances to avoid
insolvency.

Many of the 45 savings banks
operating in Spain have struggled after investing heavily in the property
sector, causing a boom in construction before its collapse following the financial
crisis.

But the market’s collapse has now
left lenders with debts worth 445bn euros ($550bn; £380bn), according to
Goldman Sachs.

One of them, Cajasur, was taken
over by Spanish authorities earlier this month after talks to merge it with a
profitable bank ended.

Recovery ‘muted’

Investor concerns that Spain could
face a Greek-style debt crisis have prompted the government to approve a tough
and unpopular 15bn-euro ($18.4bn; £13bn) austerity package to shore up its
public finances.

The government wants to cut its
public deficit to 3% of GDP by 2013 from 11.2% last year.

Many Spaniards fear the effect the
cuts will have on the economy in a country already struggling with an
unemployment rate of 20% – twice the eurozone average.

The country moved out of recession
in the first quarter of this year, with growth of 0.1%.

But Fitch said the economic
recovery would be “more muted than that forecast by the government”.

“The economic adjustment
process will be more difficult and prolonged than for other economies with AAA
rated sovereign governments, which is why the agency has downgraded Spain’s
rating to AA+,” it said.

“The inflexibility of the
labour market and the restructuring of regional and local savings banks will…
hinder the pace of adjustment, particularly in the aftermath of the real estate
boom,” it warned.

The European Union has been anxious
to see more fragile European economies – including Spain, Portugal and Greece –
impose tougher austerity measures.

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