Spain’s credit rating downgraded by Fitch as international bailout looms

 

The ratings agency Fitch delivered a strong rebuke to Europe‘s policy elite tonight when it sharply downgraded Spain‘s creditworthiness and moved the eurozone’s fourth-biggest economy a step closer to an international financial bailout.

Fitch said mistakes at a European level that had allowed the debt crisis to escalate were in part to blame for its decision to cut Spain’s credit rating by three notches to just above junk bond status.

The move – which follows the pattern that led to Greece, Ireland and Portugal needing help from Europe and the International Monetary Fund – makes it harder and more expensive for Spain to borrow money on the world’s financial markets.

Fitch, which also served notice to George Osborne that the UK faced losing its AAA status if the double-dip recession intensified, cited the ballooning cost of bailing out Spain’s struggling banks and a longer-than-expected slump for the downgrade from A to BBB.

“The dramatic erosion of Spain’s sovereign credit profile and ratings over the last year in part reflects policy missteps at the European level that, in Fitch’s opinion, have aggravated the economic and financial challenges facing Spain as it seeks to rebalance and restructure the economy,” the agency said.

“The intensification of the eurozone crisis in the latter half of last year pushed the region and Spain back into recession, exacerbating concerns over sovereign and bank solvency. The absence of a credible vision of a reformed EMU and financial ‘firewall’ has rendered Spain and other so-called peripheral nations vulnerable to capital flight and undercut their access to affordable fiscal funding.”

Amid growing fears for the health of Spanish banks that lent aggressively to fund the country’s property bubble, Fitch said it believed the recapitalisation of the struggling financial sector would be €60bn (£49bn) – double its previous estimate.

“Spain is forecast to remain in recession through the remainder of this year and 2013, compared to Fitch’s previous expectation that the economy would benefit from a mild recovery in 2013,” the agency said. It added that Spain had been especially vulnerable to a deterioration in Europe’s debt crisis because it had a high level of foreign debt and it suffered from a lack of investor confidence in the ability of Madrid to get to grips with the country’s budget deficit and restructure the banks “in a timely fashion”.

Fitch said that Spain remained at risk of a further downgrade and that its new BBB rating was based on the assumption that it would get help from Europe to bail out its banks, although not necessarily the sort of strings-attached package required by Greece, Ireland and Portugal.

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