Danske Markets says S&P downgrade of Spain a surprise

Frank Øland, senior economist at Danske Markets, says the announcement last night of a downgrade in Spain’s sovereign credit rating by Standard & Poor’s was likely to have come as a surprise to investors who were waiting for a possible downgrade by Moody’s.

In a note he said that the criticism by S&P of the unclear direction in eurozone policy, as well as ongoing risks to Spain’s budget performance, was understandable.

“The Spanish government expects that the economy will shrink by half a percent next year. We estimate that they should be glad if growth comes in at -1.5%,” Øland said.

Given that the deficit in official finances will be above 7% of GDP, then next year’s target of a deficit of 4.5% of GDP looks almost impossible, without creating austerity that leads to a significantly deeper recession, he added.

The downgrade now could create further uncertainty around Spain’s situation, although that in turn could be the spur to get the country’s prime minister Mariano Rajoy to finally ask for help from eurozone partners and the ECB.

“There is now a real risk that Spain could end up being graded as junk by both Moodys and S&P. If two of the three big credit rating agencies end up considering Spain junk, then many larger investors will completely walk away from them as investment opportunities.”

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