Friday

29th Mar 2024

Spain receives downgrading warning from ratings agency

Spain became the third Eurozone country to receive a warning from ratings agency Standard & Poor's on Monday (12 January) in a further sign of Europe's economic malaise.

Last Friday, both Ireland and Greece also received warnings from the ratings agency, a development that threatens to make government borrowing for the three states more expensive at a time when governments are increasingly turning to money markets to bolster diminishing tax returns.

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  • Spain became the third Eurozone state Monday to receive a credit warning about it national finances (Photo: European Commission)

The Financial Times reports that other countries could also see themselves subject to similar warnings in the coming days or weeks as countries take on record debt levels, in part caused by new spending programmes intended to counteract the ongoing economic crisis.

Italy, with a debt-to-GDP ratio of 104 per cent is seen as particularly vulnerable. So too Portugal, which is currently running a current account deficit of 12 per cent.

Figures announced last week show Spain's industrial output for November to be down 15.1 per cent on the previous year, the biggest fall on record.

This, coupled with the country's now three million people currently out of work, highlights the predicament facing the Socialist government led by Jose Luis Zapatero.

In a sign of the growing divergence between Eurozone economies, the ten-year bond spread between Spain and Germany (the difference in yields offered on government bonds) reached nearly a full percentage point, a record since the launch of the euro.

Monday's Le Figaro newspaper reports current head of the Eurogroup Jean-Claude Juncker as saying he feels the Eurozone economy will continue to face tough times over the course of 2009 and 2010 and will only start emerging from the recession in 2011 or 2012.

He also stressed the importance of government pressure on banks to restart lending, a vital stop on the road towards the Eurozone's economic recovery.

Regulation of ratings agencies

European commissioner for the internal market Charlie McCreevy said on Monday that regulation of ratings agencies such as S&P, Moody's and Fitch should be centralised at the European Union level.

Under his current proposal, currently being debated by the European Parliament, ratings agencies would have to be registered to operate in the 27 member states, and subject to day-to-day supervision and inspections Reuters reports.

Supervision of the agencies would be carried out jointly by national regulators and the Committee of European Securities Regulators – a forum for all national regulators in the EU.

Mr McCreevy blames ratings agencies for failing to spot the danger behind financial products such as US sub-prime mortgages.

Such mortgages were frequently repackaged into complex financial products that received high credit ratings and sold on to European investors.

The commissioner's plan for further centralisation of credit agency regulation is unlikely to be passed by the European Parliament and member state governments without amendments however.

Jean-Paul Gauzes, the French centre-right MEP charged with steering the bill though the European Parliament, says he wants key changes and Reuters says a number of member states are concerned about a potential loss of influence over the agencies.

Germany may change constitution over economic crisis

Germany is to take the radical step of changing its constitution in order to ensure excessive public borrowing is prevented, the country's chancellor, Angela Merkel, announced on Tuesday.

'Swiftly dial back' interest rates, ECB told

Italian central banker Piero Cipollone in his first monetary policy speech since joining the ECB's board in November, said that the bank should be ready to "swiftly dial back our restrictive monetary policy stance."

Opinion

EU Modernisation Fund: an open door for fossil gas in Romania

Among the largest sources of financing for energy transition of central and eastern European countries, the €60bn Modernisation Fund remains far from the public eye. And perhaps that's one reason it is often used for financing fossil gas projects.

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