It’s Spain’s Time to Try to Dodge the Bullet

FT

Fears that Greek debt crisis will spread to other eurozone nations intensified on Wednesday when Spain suffered a debt downgrade Spain's Economic Crisisfrom Standard & Poor’s, sending the euro to fresh lows against the dollar.

The downgrade, by one notch from AA plus to AA, dealt a blow to Spain’s frantic efforts to avoid contagion from Greece and followed S&P downgrades this week of Greece and Portugal.

As financial markets continued to gyrate and investors offloaded Spanish stocks and bonds, the head of the Organisation for Economic Co-operation and Development compared the growing debt crisis to the Ebola virus.

“It’s not a question of the danger of contagion; contagion has already happened,” Angel Gurría told Bloomberg. “This is like Ebola. When you realise you have it you have to cut your leg off in order to survive.”

Credit rating agencies have been criticised for their role in the financial crisis, but their views are still closely watched by investors anxious about the deteriorating public finances of some of the world’s most heavily indebted countries.

S&P’s announcement hit Spain’s stocks and bonds. Spanish 10-year bond yields, which have an inverse relationship with prices, rose to 4.127 per cent, while the stock market tumbled 3 per cent.

Greek bond prices fell further in the wake of Tuesday’s downgrade of Greece’s credit rating to junk status by S&P. Ten-year bond yields jumped to 9.91 per cent. The euro was down 0.1 per cent at $1.3135, its lowest since April 2009.

Earlier, speculation that an International Monetary Fund and eurozone rescue package for Greece could rise to as much as €120bn ($158bn) over three years had provided some support for financial markets.

German parliamentarians said after meeting Dominique Strauss-Kahn, IMF managing director, and Jean-Claude Trichet, president of the European Central Bank, that Greece would need financial aid of €100bn to €120bn over the next three years.

The €45bn currently proposed, they said, was only enough for the first year.

Mr Strauss-Kahn refused to confirm the higher figure on Wednesday, saying that details of the talks would be announced once the entire Greek standby programme had been finalised by IMF, ECB and European Commission officials meeting the Greek government in Athens.

In Brussels, the Commission told credit rating agencies weighing up risks in Greece that it expected them “to take due account of the fundamentals of the Greek economy and the support package”.

“We, of course, expect that credit rating agencies, like other financial players, and in particular during this difficult and sensitive period, act in a responsible and rigorous way,” said a spokesperson for Michel Barnier, EU internal market commissioner.

Greece is expected to conclude negotiations on its rescue this weekend. George Papandreou, prime minister, told his cabinet: “We’re determined to reverse past mistake … we have to create in the shortest possible time a viable economy with growth and jobs for everyone.”

With Spain the latest developed nation to feel the heat from growing market nervousness over high budget deficits and rising public debt, S&P said it downgraded the country’s long-term sovereign debt after revising downwards its assumptions for medium-term Spanish growth.

“We now believe that the Spanish economy’s shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,” Marko Mrsnik, credit analyst, said.   More…