Downgrade pushes Spain closer to bank bail-out
by Daniel Mason
Ratings agency Fitch last night slashed Spain's creditworthiness because of the cost of recapitalising the country's banking system, higher than expected government debt and a prolonged recession – pushing it closer to an international bail-out. Meanwhile talk of greater political integration in the eurozone has intensified after Angela Merkel called for more powers to be ceded to the European level.
Fitch downgraded Spain by three notches from A to BBB, just one level above junk status, and assigned a negative outlook to the rating, meaning a further cut is possible. It blamed "policy missteps at the European level", which it said had "aggravated the economic and financial challenges" faced by the country. The rating agency predicted that the cost of rescuing Spain's banks would be between €60bn and €100bn, having previously put the figure at just €30bn. A €60bn bank bail-out would push government debt up to a peak of 95 per cent of gross domestic product by 2015, Fitch said, well ahead of its earlier estimate of 82 per cent by 2013.
Rising borrowing costs have reduced the government's financing flexibility, "constraining its ability to intervene decisively in the restructuring of the banking sector and has increased the likelihood of external financial support", Fitch said. It is widely expected that Spain will soon seek assistance from the European Union rescue fund, the European Financial Stability Facility, to support its banks – but it does not want a full bail-out with strings attached and external supervision as in the cases of Greece, Ireland and Portugal. Spain, the eurozone's fourth largest economy, is expected to remain in recession throughout this year and next. Previously Fitch had forecast a mild recovery in 2013. It warned that Spain was also "especially vulnerable to contagion" from Greece.
The downgrade came on the day German Chancellor Angela Merkel said the EU member states would have to "give up more power to Europe and grant Europe more oversight" to solve the eurozone's problems. Speaking to Germany's ARD television, she said: "We do not just need a currency union but also a so-called fiscal union – more common budget policy". There were signs today that the German economy was being dragged down by the crisis, with seasonally adjusted imports dropping by 4.8 per cent in April – the sharpest fall in two years – and exports declining by 1.7 per cent. Industrial production also fell more than expected in Italy in April.
Calls for Europe's leaders to take decisive action to stem the crisis have also grown louder. Yesterday the Turkish Prime Minister Recep Tayyip Erdogan said the EU should "use this crisis to build a stronger policy and reinvent itself". In a speech at the Astana Economic Forum in Kazakhstan, he echoed Merkel by saying Europe needed "to move towards greater integration". He also said credit rating agencies should "take into account the consequences of their ratings", adding that their actions "can hurt the countries that are being rated".
After meeting Merkel yesterday, British Prime Minister David Cameron said he could "understand" why eurozone countries "have to look at deeper integration". But he insisted he would "make sure that Britain's interest, particularly in the single market, is protected". He said he "wouldn't for instance ask British taxpayers to stand behind Greek or Spanish deposits" as part of a banking union proposed by the European Commission this week.
Meanwhile the United Kingdom Independence Party, which favours the country's withdrawal from the EU, dismissed as 'the worst possible option for us" an idea put forward by former foreign secretary Lord Owen that a two-tier Europe should be created, involving deeper political integration in the euro area and a wider European Community based on trade. Owen said a referendum on the United Kingdom's place in Europe was "inevitable".
"We would still be subject to all the damaging rules of the bureaucratic single market, controlling employment regulations, free movement of labour, tariff barriers etc, while the main economic decisions would be made by the German controlled fiscal union," said UKIP deputy leader Paul Nuttall. "Europe's economy is in long-term decline. Finding new and ever more imaginative ways of tying ourselves to it is simply crazy. Britain's economic future lies in the Anglosphere, the Commonwealth and the emerging economies, where we can once again flourish."
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Lord Owen has a cheek to suggest new ways forward for the European Union. Does he not realise that because of our membership, the British taxpayer looses billions of pounds - which, if not sent to the EU, would give our elderly proper care and give us employment. Most of all, if we leave the EU - Britain would not be under a dictatorship.
Frances Fox - England