Spain downgrade sparks European sell-off

Spain's debt has been downgraded in a further widening of Europe’s government debt crisis.

The move follows its reductions yesterday of Portugal and Greece, which sent shock waves through world markets.

Standard & Poor’s said its decision to downgrade Spain’s credit rating by one notch to AA from AA+ is due to its expectation that the country will suffer an “extended" period of subdued economic growth.

“We now believe that the Spanish economy’s shift away from credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,” S&P credit analyst Marko Mrsnik said.The euro dived to another one-year dollar low of $1.3129 following the announcement, reaching a level last seen in late April 2009.

The FTSE 100 index, which had largely recovered its losses by early afternoon as fears about Greece's debt contagion eased,fell 16.91 points or 0.3 per cent to 5,586.61 following the news. Germany’s DAX and France’s CAC 40 fell between 0.3 and 1.5 per cent. Spain’s IBEX index fell 3 per cent and Portugal’s PSI 20 was down 1.9 per cent.

Spain appealed for market calm, with the deputy prime minister saying the government was cutting the public deficit.

“We have a very serious plan of fiscal consolidation and of deficit reduction. We have adopted an austerity programme, we have put in place a labour market reform,” Maria Teresa de la Vega said.

“We are adopting all the measures needed to meet our commitments. So I want to send a message of confidence to the population and of calm to the markets."

Earlier today the European Commission called on credit rating agencies to act responsibly after Standard & Poor’s downgraded Greece’s debt to junk status.

The price of insuring Greece’s debt against default soared to the highest rate in 14 years as the country’s securities regulator banned short-selling in Greek shares in an attempt to halt a crisis of confidence. The Greek securities regulator announced a ban on short-selling in Greek shares on the Athens market until June 28.

The yield on Greek sovereign bonds rose to more than 11 per cent on yesterday’s downgrade of the country’s credit rating.

“It is not up to the Commission to say whether the rating given by any one credit rating agency is correct or not. What we can say is that we have full trust in Greece and action being taken,” Chantal Hughes, the financial services spokeswoman for the EU Commission said.

“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.”

The International Monetary Fund and Eurozone country leaders were working today to prepare a rescue package of €30 billion (£26 billion) for Greece.

The EU President Herman van Rompuy said that he was “fully confident” that an agreement would be reached in the coming days on a “very strong and ambitious adjustment programme which will set a credible, medium-term strategy for the Greek economy.”

S&P also reduced the sovereign rating for Portugal, and today the Lisbon stock market fell as much as 5.7 per cent as traders feared that a virus of insolvency and bad debts would infect the rest of Europe.

Francois Baroin, the French Budget Minister, attempted to ease investors’ fears over Portugal. “The situation in Portugal is not the same as in Greece. The debt level is important but the Portuguese did not lie [about their finances],” he said.

Greece needs to repay €8.5 billion of maturing bonds on May 19. George Papaconstantinou, the Greek Finance Minister, said yesterday that the country could no longer afford to borrow.

Last night it was reported that the International Monetary Fund was prepared to put in another €10 billion.

Greece faces a formidable obstacle to receiving the rescue cash. Angela Merkel, the German Chancellor, has promised to join the rescue only if Athens makes budget cuts lasting several years.

German public opinion, however, is set against the rescue package, of which Germany would pay €8.5 billion. “People in Germany ... worry that we will have to pay for a long time for Greece,” Klaus Abberger, an economist at the German Ifo Institute, said.

A temporary exit from the eurozone was raised as a solution by the German Free Democratic Party, the liberal coalition partners of Ms Merkel’s Christian Democrats. This could offer Greece a partial reprieve if a devalued currency boosted the Greek economy and helped to avoid mass unemployment, Ben May, an economist at Capital Economics, said.

“Exiting the euro temporarily is not going to solve all their problems. They need to make structural adjustments that ensure competitiveness isn’t lost when they rejoin,” he said.

Source:The Times