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Standard & Poor’s has cut Spain’s credit rating and warned of risks to come.

S&P cut Spain two notches to BBB+, warning that the country could have to take on more debt to support its banking sector.

The ratings agency has also placed Spain on negative outlook, meaning there is a risk of further downgrades to come.

S&P predicts the Spanish economy will shrink by 1.5% this year, having previously forecast 0.3% growth.

In 2013 it expects the economy to contract 0.5%, having previously predicted 1% growth.

Standard & Poor's has cut Spain's credit rating and warned of risks to come

Standard & Poor's has cut Spain's credit rating and warned of risks to come

S&P also gave a damning assessment of the situation in the rest of Europe, saying: “In our view, the strategy to manage the European sovereign debt crisis continues to lack effectiveness.

“We think credit conditions, and hence the economic outlook for Spain, could now deteriorate further than we anticipated earlier this year unless offsetting eurozone policy measures are implemented to support investor confidence and stabilize capital flows with the rest of the world.”

The agency suggested such measures could include a pooling of resources and obligations between eurozone countries and policies to harmonize wages across the currency bloc.

But there were some positive comments about the measures taken by the government.

“Despite the unfavorable economic conditions, we believe that the new government has been front-loading and implementing a comprehensive set of structural reforms, which should support economic growth over the longer term,” S&P said.

“In particular, authorities have implemented a comprehensive reform of the Spanish labor market, which we believe could significantly reduce many of the existing structural rigidities and improve the flexibility in wage setting.”

But S&P concludes that the labor market reforms will not create employment in the near term and predicts that “the already high unemployment rate, especially among the young, will likely worsen until a sustainable recovery sets in”.

Spain has Europe’s highest rate of unemployment at 23%, with more than half of young people out of work.

 

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Moody’s rating agency has cut Greece’s credit rating again, citing a risk of default despite a recent debt write-off deal.

Moody’s cut Greece’s rating from “Ca” to “C”, the lowest level on its scale.

The agency said on Friday: “Today’s rating decision was prompted by the recently announced debt exchange proposals for Greece, which imply expected losses to investors in excess of 70%.”

The deal writes off 107 billion Euros ($141.3 billion) of Greece’s debt.

Moody's rating agency has cut Greece's credit rating again, citing a risk of default despite a recent debt write-off deal

Moody's rating agency has cut Greece's credit rating again, citing a risk of default despite a recent debt write-off deal

Moody’s said the planned debt exchange, which involves private investors of Greek debt writing off much of the 206 billion Euros in Greek bonds they hold, “would constitute a distressed exchange, and hence a default”.

The agency acknowledged that the deal was necessary to help stabilize Greece. But Moody’s said: “The risk of a default even after the debt exchange has been completed remains high. Moody’s believes that Greece will still face medium-term solvency challenges.

“The country is unlikely to be able to access the private market once the second assistance package runs out; and its planned fiscal and economic reforms will still face very significant implementation risks.”

Earlier this week the Standard & Poor’s agency classified Greek debt as in “selective default”.

 

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