Thursday

29th Jul 2021

Spain downgraded to near junk despite cuts

  • Metro stop in Madrid: The country has been downgraded to near-junk (Photo: Olmo Calvo Rodríguez)

Standard & Poor's ratings agency on Wednesday (10 October) downgraded Spain to almost "junk" despite its fresh set of austerity measures, disproving the EU commission's view that budget cuts are "restoring credibility on the markets."

"The downgrade reflects our view of mounting risk to Spain's public finances, due to rising economic and political pressures," the ratings agency said in its note.

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"The deepening economic recession is limiting the Spanish government's policy options," it added, as Madrid is trying to avoid for as long as possible having to ask for another bailout on top off the €100 billion earmarked for its banking sector.

Fresh spending cuts to the tune of €13 billion unveiled last month had been praised by the European Commission as a sign of Spain's commitment to reduce its budget deficit and restore its "credibility" on the markets.

But a deepening recession, combined with the highest unemployment rate in the EU and angry protests against the ever-growing austerity are complicating that plan.

In addition, the International Monetary Fund itself - the world's biggest lender to governments risking bankruptcy - warned earlier this week that policies based on too much austerity are wrong.

With Spain's fresh downgrade, the country will now face another spike in its borrowing costs, which had gone down in recent weeks after the European Central Bank announced a potenial bond-buying scheme.

The ratings agency also put Spain under "negative outlook," meaning further downgrades are possible in the future.

Spain's deficit for this year has been revised twice and now stands at 7.4 percent of GDP due to the banking bailout, while its government debt is likely to go beyond 90 percent of GDP next year.

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Protesters clashed with riot police on the streets of Madrid on Tuesday, as Spain braces itself for a fresh round of spending cuts linked to a potential bailout.

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Spanish Prime Minister Mariano Rajoy on Tuesday said his government has not yet taken a decision on asking for European help in refinancing its debt, pending a key meeting of the European Central Bank next week.

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Markets rallied on Tuesday when two German lawmakers suggested Berlin is warming to the idea of a Spanish bailout. But the wait-and-see game in Madrid is likely to take a few weeks longer.

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