Credit rating agency Standard & Poor’s (S&P) has downgraded the Spanish government debt by one notch, from AA to AA-. The same action was taken by rating institution Fitch only seven days earlier, raising fears about the solidity of the country’s public finances.
S&P justified the action as being motivated by Spain’s deteriorating economic indicators. "Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still-high level of private sector debt, and the likely economic slowdown in Spain's main trading partners".
Forecasts by the Economist support these fears. Spain’s growth, already very weak, is expected to go down from 0.7% of GDP to 0.4% by 2012. The labour market has long been crippled by an unemployment rate equal to 21.2%, Europe’s highest.
With these unsettling indices, it is clear that the country is likely to experience a higher cost of borrowing in the following months.
The spread between the Spanish interest and the German one, now at 2.9, could widen in the future, despite having recently improved, owing to Prime Minister Zapatero’s announcement of early elections, which had initially raised the markets’ confidence in the state’s institutions.
This, however, has not proved to be enough for S&P, which claims that Spain may be further downgraded if the institutions fail to give credible answers to the debt crisis and the country does not soon enact the reforms that are needed to boost growth and improve conditions in the labour market.