Fitch's Spain downgrade casts more shadow on Europe's economic outlook

08:08, May 31, 2010      

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Amid skepticism over the European Union's ability to clamp down the debt crisis and keep it from spreading to other weaker economies, U.S. markets rattled as global rating agency Fitch cut Spain's credit rating to AA+ from AAA on Friday.

The move not only rekindled the uncertainties that caused the euro depreciation early this month, but also activated the jitters over Europe's debt woes.


Fitch Ratings downgraded on Friday Spain's credit status by one notch, saying its economic recovery would be more muted than the government forecast.

"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+," Fitch said.

It also said the process of reducing the "private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term."

This move came just one day after the lower chamber of Spanish parliament passed by only one vote a package of 15-billion-euro (18.5-billion-dollar) austerity measures.

Some analysts said Fitch "deliberately" choose the day, -just after the passing of Spain's austerity plan, -to make the announcement, highlighting the agency's doubts over the country's ability to ensure economic growth while cutting the deficit.

Though it is too late for the European market to show their reaction over Spain's downgrade on Friday, the downgrade proved to be strong enough to affect U.S. market with its major indexes tumbling in afternoon trading.

Meanwhile, the euro returned all its Friday gains, and continued its losses against the U.S. dollar while the oil markets continued to plunge as investors fretted over the broader impact of eurozone debt crisis on global growth.


Spain's downgrading reignited concern over the festering eurozone debt problem, and dampened investors' appetite for higher-risk assets.

It also gave another blow to Europe's fragile and tentative recovery, which may be shown on Monday's markets.

"Asymmetric recoveries across the euro zone area and large divergences in competitiveness, growth and inflation prospects also present policy challenges (in Europe)," Ruth Stroppiana, Chief International Economist, said in an article posted in February at Moody's

The challenge has already turned up amid concerns that the sovereign debt crisis could infect banks.

Jamie Dimon, CEO of JP Morgan Chase, warned Europe of the prospect of costly banking bailouts if weaker economies like Greece do not make good on their debts. "A lot of that sovereign debt is owned by European banks, so when these countries have problems, so will their banks."

"The big challenge is to prevent the vicious circle, that means for example the crisis of the public sector turning into a banking crisis," said Ewald Nowotny, a European Central Bank governing council member earlier.



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