Standard & Poor’s Ratings Services has affirmed its ratings on Spain, citing its strong commitment to comprehensive fiscal and structural reform.
S&P said Wednesday its BBB+ rating on Spain is supported by its diversified prosperous economy, stable political system, and the ongoing implementation of a comprehensive fiscal and structural reform agenda. The rating is constrained by the high external leverage in Spain’s financial sector, significant contingent liabilities, and remaining inflexibilities in the economy, including its still highly segmented labour market, it notes.
While the ratings have been affirmed, the outlook on the long-term rating is negative, which S&P says reflects its view of the multiple risks to Spain’s economic rebalancing, the potential for the realization of additional contingent liabilities, and the effectiveness of the eurozone policies in stabilizing funding markets.
The Spanish economy is adjusting rapidly away from internal towards external demand, S&P reports. However, it notes that this has hurt government tax receipts, keeping debt levels high. Also, the pace of deleveraging has accelerated this year, which S&P says is likely to lead to an even higher contraction of investment and consumption in both the public and private sectors, which could also imperil its fiscal targets.
“Our baseline scenario is that during this period of intense reductions in private and public sector net borrowing, Spain will continue to receive support, including financial, from its European partners and the [European Central Bank (ECB)]. In our view, this should contribute to the government’s efforts to restore confidence in the financial sector and lay the foundation for a sustainable recovery,” it says.
S&P says its current net general government debt projections assume that official loans to distressed Spanish financial institutions will eventually be mutualized among all eurozone governments, and so Spanish net general government debt would remain below 80% of GDP beyond 2015.
However, it also cautions that any official assistance is vulnerable to delays “in the eurozone’s plans to pool sufficient common resources to support sovereign lending facilities, to create a banking union with a single regulator and a common resolution framework by end 2012, and to move toward closer fiscal integration.”
“We agree with ECB President Mario Draghi who said on July 26 that financial fragmentation within the eurozone is at the heart of the union’s broader economic problems. In our view, if this fragmentation is not reversed, Spain’s economy could contract sharply, unemployment rise even further, social cohesion fray, and reforms stall or reverse,” it says.