S&P Downgrades Spain

S&P cut Spain’s long term rating to AA today with a negative outlook. From Bloomberg:

S&P said in a statement today that the outlook on Spain is negative, reflecting the chance of a possible further downgrade if the “budgetary position underperforms to a greater extent than we currently anticipate.” Spain was last cut by S&P in January 2009.

The risk premium investors demand to hold Spanish bonds surged to the highest in more than a year today and the price of insuring Spanish bonds against default reached a record as doubts about Greece’s ability to pay its debt spilled over into Spanish and Portuguese markets…

“We now project that real GDP growth will average 0.7 percent annually in 2010-2016,” S&P said.

From the Wall Street Journal:

The ratings agency said that the Spain is likely to have an extended period of subdued economic growth, which weakens its budgetary position. The move sent equities in Spain the U.S. broadly lower, while the euro fell back to a one-year low against the dollar of $1.3131….

In addition, S&P took into account the possibility that Spanish public and private sector borrowing costs could remain elevated this year and next and further slow Spain’s recovery from the current recession.

S&P warned that “additional measures are likely to be needed to underpin the government’s fiscal consolidation strategy and planned program of structural reforms.”

Main factors dampening Spain’s medium-term growth prospects include private sector indebtedness, which S&P estimates is higher than that of many of Spain’s peers, as well as high unemployment, a fairly low export capacity, and an unwinding of the government’s fiscal stimulus as part of its current efforts to reduce general government deficit to 3% of GDP by 2013.

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    1. andy

      My thoughts, exactly. Didn’t everyone already know Spain was in trouble? What does this change?

    2. chad

      I came here to say the exact same thing. How can anyone believe anything the ratings agencies say?

    3. Mikhail Kropotkin

      Does anyone have a fix on how far the ratings agencies need to drive the rates in the EU so that Wall Street can finish collecting on their positions in the EU?

  1. charcad

    Well, “European” statecraft centered on the Brussels-Paris axis has met my personal expectations perfectly. They have again fallen exactly in the center between two stools. They neither ejected Greece from the euro in time or provided timely aid. They instead did nothing and supinely presided over the exponential growth of a first class crisis.

    I think Simon Johnson has caught the right theme: “Wake The President”. Also wake the National Security Advisor, the Secretary of State, the Chairman of the Fed and (unfortunately) wittle Timmy next door to the White House.

    There are two premier issues.

    1. First and foremost is the shape of Germany’s future relations with Russia post-Euro. Our two practical options are to either severely limit these or get into extremely tight alliance with an emerging “Russmany”.

    The most disastrous outcome for the USA would be a hostile Russmany aligned with China. This must be avoided at all costs.

    If in all the circumstances our elites wish to prevent “Russmany”, now is the time. That means sustaining the EU in essentially its present form. Another $2-$3 trillion on the national debt will be a small price to pay compared to other possible bills later. Alternately we have to become the midwives and godparents for “Russmany” and bring it about in a way that’s correlated to our own interests.

    What is not an option is copying the Quai d’Orsay’s usual method of doing nothing, loudly announcing everything and failing at both strategies. Events are taking place now that will determine the USA’s destiny into the 22d Century.

    2. Of secondary importance is preventing another outbreak in the Balkans. Only mere hundreds of thousands of lives are at stake here, rather than many millions as in #1. However, the possible disease vectors have expanded to include Greece.

    1. Vinny

      Regarding (1), didn’t two crazy guys named Hitler and Stalin try that already, clearly with “mixed” results? Why bother again?

      Regarding (2), not sure anybody in the Balkans is interested in war anymore. Last I looked everybody of draft age was rehearsing for the Eurovision song contest. :)


      1. charcad

        Regarding (1)…Why bother again?

        It’s a recurrent theme in German-Russian relations. They’re perfectly fitting trade partners. And the Russians actually pay, too. German technology, Russian oil, gas and raw materials.

        There is a serious mismatch in German domestic and foreign politics. All of German domestic politics and culture say “no bailouts”. This is incompatible with the Latin and Mediterranean centric EU that Paris will be perpetually promoting as a counterweight to German economic dominance.

        Greeks, Portuguese, Spanish and Italians do things differently than countries bordering the Baltic. It doesn’t mean they’re wrong and the Germans are right. It means they’re very different.

        I’ve said here before that I personally believe the EU as currently constituted is inherently unstable, just like all modern French diplomatic constructs. The existing EU certainly has little economic coherence.

        The French “Little Entente” system of Eastern European client states in the 1920s & 1930s went the same way. And the British very stupidly allowed themselves to get sucked into sustaining it starting in late 1938. And after most of it was already destroyed.

        In my opinion the US attitude to perpetuating the current “EU” or promoting a future “Russmany” should be principally determined by our assessment of China’s potential behavior in coming decades. Again, in my opinion, if there are the slightest doubts about the Barney/Sesame Street view of the one party dictatorship that is nuclear China then we’ll desire robust allies as insurance against Forbidden City imperial hubris. Specifically: “Russmany”.

        Like I said, we are experiencing events now whose outcome will influence the USA’s destiny well into the 22d Century.

        Regarding (2)

        Everyone’s always getting ready for Eurovision the entire year. Including the girlfriends and wives of Russian kontractniki in Chechnya, South Ossetia and other spots where boys just wanna have fun.

        The draft age generation wasn’t in favor the first time, either. They never are. But it started from very small seeds of economic discontent. The initial demonstration in the late 80s was far smaller and more peaceful than the ones regularly rolled out in Athens now.

  2. charles

    A view from Europe:

    So goes one of the triple AAA. No wonder the Germans are
    barking again for the birth of a European rating agency. Now, who’s next at the speed they are going ? In any case, whatever happens before that date, imho, I predict UK’s downgrade in the week following the May 6 th general elections, as rating agencies said they were ‘waiting’ for the outcome, though none of the candidates has the slightest proposal on how to cut the UK’s deficit ? Belgian elections are now scheduled for June, maybe the surprise will hit them before ?

  3. PDC

    It is REALLY Greece that matters? Or Spain? Or Portugal? Or…?
    My guess is that what’s happenig is just a big derivative speculation, one of the biggest we have ever seen up to date.
    Goverments are not ready yet to see how “CDS economy” is the biggest threat they are facing. Obviously, some (many) politicians have just been bought, but there is a cultural problem too, especially in Europe.
    Still, my bet is that EU governments will be forced to spend whatever is needed to put out this fire.

    1. Glen

      Yes, the naked short derivatives leveraged off the debt are what cost so much.

      If Europe handles this smartly, the outcome will be to make derivatives worthless. Just don’t pay them. Let whoever is AIG this time go under. Let the TBTF banks that shorted this mess eat the loss. Don’t do bank bailouts! Otherwise TBTF banks short the whole world and we all go down.

  4. Nostradoofus

    Why are credit downgrades procyclical, Yves? As with Spain today, we often see downgrades during an unfolding credit panic. This fuels the panic.

    Is the reason for this fundamental or optical?

    Obviously credit becomes harder to roll over during a panic. But since panics do happen, why didn’t the rating agency consider this risk at the outset?

    Other than this, I see nothing different in in Spain’s creditworthiness today vs yesterday. Is this just a reputational CYA for the rating agency?

    What is the real reason for the timing?

    1. Yves Smith Post author

      The ratings agencies do not like being too far behind the markets. So if a bond starts falling in price and their ratings are too far out of line, they look like idiots. So they downgrade.

      Of course, the downgrade validates existing doubts, which often leads the price to go lower.

      Credit is ultimately about confidence, which is more emotional than logical, hence the “procyclical” action.

  5. cyborg

    I think we should take a moment to praise our European leaders, who, while America was frothing at the mouth and yet dithering and blathering, took effective action to solve one of the most frustrating problems of the times: China’s cynical mercantilist policies through their persistent under-valuation of their currency.
    Europe has quietly and successfully implemented a 20% re-evaluation of the yuan against the euro without a peep from either the markets or the Chinese. This will protect domestic activity against subsidised competition from Asian exports, it will protect workers’ jobs and their wages from the ever-downward pressure from Chinese wages and working conditions, and it will protect our energy intensive industries from freely-polluting, carbon-unconstrained factories out there.

    And the most brilliant part is that no one has noticed! But they deserve our congratulations. Nobody could have expected such bumbling incompetence in the resolution of the minor debt crisis in Greece, and that show of procrastination, inconsistency and pigheadedness (rather than strongheadedness) have brilliantly scared investors away from the euro. Congratulations!

    1. Vinny

      Yes, a very clever move indeed. Who would have thought there was so much genius material laying around down in Brussels, ready and willing to spring into action on a moment’s notice…lol

      Next thing now is to try (via IMF’s austerity measures) to lower Portuguese Italian, Irish, Greek, and Spanish salaries below those in China. That will make Europe competitive once again.


  6. Tom Bradford

    Way past time to outlaw Ratings Agencies. In the US they provoked a major credit crisis by taking money in exchange for rating garbage AAA, in Europe they are triggering sovereign debt crises with self-fulfilling prophecies of doom. Even here in lil’ ol’ New Zealand a comment from Fitch had the Government wetting its pants and promising to change its democratically-mandated policies.

    Let anyone wanting to invest do their own due diligence, or employ someone with a fiduciary duty of care to them to do it for them.

    1. PJM

      Well, we must to read some things about what is happening today:

      “Reflexivity is based on three main ideas:[19]

      1. Reflexivity is best observed under special conditions where investor bias grows and spreads throughout the investment arena. Examples of factors that may give rise to this bias include (a) equity leveraging or (b) the trend-following habits of speculators.

      2. Reflexivity appears intermittently since it is most likely to be revealed under certain conditions; i.e., the equilibrium process’s character is best considered in terms of probabilities.

      3. Investors’ observation of and participation in the capital markets may at times influence valuations AND fundamental conditions or outcomes.”

      In http://en.wikipedia.org/wiki/George_Soros

      This is a game riged to destroy the €uro. When these perhaps I should wright a book about this episode. ;) Its so cristal clear that isnt surprise for who has some years of experience in the markets.

  7. Abhishek

    Looks like Spain is looking to pseudo default already . There have been numerous industry rumors that Spain may cut back on the guaranteed FIT rates that it has given to solar plants in the past.This would not only cause a huge amount of problem for renewable energy in Spain but have repercussions throughout the world as private investors in renewable energy rethink about their investments

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