Spain downgraded just after receiving bail-out confirmation
by Dean Carroll
On the day Spain received formal confirmation from eurozone ministers of its €100bn bank bail-out to a backdrop of street protests, the country was downgraded by a ratings agency to just two notches above default. American firm Egan-Jones Ratings downgraded Spain from CCC+ to CC+ with a "negative outlook" and the suggestion that the country had a 35 per cent probability of default.
With 10-year bond yields at 7.18 per cent and a weakening economy, the ratings agency predicted a 1.7 per cent decline in gross domestic product. Between 2008 and 2011, Spainish debt mushroomed from €436bn to €735bn. Egan-Jones claimed that the country would fall short by €50bn on social payments alone, this year. "The country was hobbled by the global financial crisis of 2007, eviscerating the nation's GDP and causing the economy to enter into a recession during the third quarter of 2008," said a spokesman for the ratings agency. "We expect GDP to drop by 2 per cent or more in 2013. A large portion of Spain's economy was geared to the tourist and vacation trade and related construction. We do not see the vacation industries improving over the next couple of years.
"Spain has shown no willingness to implement substantive budget cuts and, therefore, debt is likely to grow. Economic weakness in Spain and the European Union make it difficult to substantially reduce high unemployment over the next couple of years." In further bad news, Spain's Ibex stock index tumbled almost 6 per cent. And economists have estimated that Spanish banks have close to €184bn of toxic real estate on their books, as a result of the property bubble bursting in 2008.
The Spanish government had already announced that it did not expect any economic growth whatsoever next year. Ministers had revised down forecasts from an expected rise of 0.2 per cent in 2013, to a contraction of 0.5 per cent - fuelling fears that the country will have to default. But under the bail-out agreement, the first €30bn payment from single currency partners will be paid to Spain before the end of July.
European Economic and Monetary Affairs Commissioner Olli Rehn said: "The aim of this programme is very clear: to provide Spain with healthy, effectively regulated and rigorously supervised banks, capable of nurturing sustainable economic growth." And International Monetary Fund Managing Director Christine Lagarde also welcomed the bail-out approval. "The recapitalisation of weak banks and the other reforms attached to the agreement are consistent with the IMF's recommendations," she said. "The implementation of these measures will contribute to significantly strengthen Spain's financial system, an essential step in restoring growth and prosperity in the country."
But the Capital Economics think-tank, in the United Kingdom, warned of worse to come for Spain. "As the reliance of the Spanish government on its banks for funding grows - alongside the reliance of the banks themselves on the European Central Bank - so the likelihood of Spain requiring a full-blown sovereign bail-out grows too; we continue to think the latter is only a matter of time," said a spokesman for the think-tank.
Why not adopt a national land value tax like Estonia, which is doing much better than most EU countries statistically - and in many very important economic categories.
Adam Jon Monroe - Chicago, US