Spain Hit with S&P Downgrade

Though Moody’s Investment Services has been the most maligned of the three top, U.S.-based credit ratings agencies by the European Union in recent months, the latest moves made by Standard & Poor’s are likely to draw ire from the so-called “PIIGS Nations” and those supporting bailout efforts alike.

In downgrading the credit rating of the city of Barcelona Monday, S&P again clarified the reasons behind its deepening concerns over the key European economy of Spain, which itself received a sovereign credit rating downgrade on Oct. 14. S&P noted that despite “signs of resilience” in the Spanish economy, there are deep problems to worry about, primarily including the state of trade partners in other “PIIGS” members struggling with debt (Portugal, Ireland, Italy, Greece). The following were listed as the top reasons for the downgrade of Spain, from AA- to A-1+, as well as the “negative” outlook going forward.
  • “Spain's uncertain growth prospects in light of the private sector's need to access fresh external financing to roll over high levels of external debt amid rising funding costs and a challenging external environment.
  • The likelihood of a continuing deterioration in financial system asset quality as reflected in the recent revision of our Banking Industry Credit Risk Assessment score for Spain to Group 4 from Group 3.
  • The incomplete state of labor market reform, which we believe contributes to structurally high unemployment and which will likely remain a drag on economic recovery.”
It’s neither the first nor, likely, the last downgrade of an EU member amid the ongoing global economic malaise and debt conundrum. However, it’s among the most notable because its economy is much larger and more critical that some of its neighbors that have struggled in such mighty fashion.

Brian Shappell, NACM staff writer