Markets stay firm despite Spanish downgrade

The Standard and Poor's building is seen in New York (Reuters/Brendan McDermid)
European markets zigzagged after the Standard & Poor’s rating agency downgraded Spain's credit by two notches, from A to BBB+ with a negative outlook, showing investors are not so pessimistic about Spain.

­Spain’s IBEX 35 gained 1.69% after initially tumbling the same number of points, while France’s CAC 40 added 1.14% after a 0.6% drop and the German DAX gained 0.90% after 0.5% plunge.

S&P downgraded Spain’s rating by two notches due to “mounting risks to Spain's net general government debt as a share of GDP in light of the contracting economy.” The firm expects the country’s GDP to shrink by 1.5% in 2012 and 0.5% in 2013. 

“If the downgrade had come two or three years ago it would have had an enormously negative effect. Over the last couple of years people and governments all over the world have learnt to take those ratings by agencies skeptically, remembering how many times they were wrong, changing the rating unjustifiably and were mistaken. Now the effect on the markets is not so acute,” says Miguel-Anxo Murado, a social-economics journalist. “Another reason is political worries in France and the Netherlands, and a slew of downbeat earnings reports for the US and Europe, the worries surrounding Spain’s economy had waned somewhat,” he adds.

The US-based ratings agency is also worried that Spain’s troubled banking sector will require fiscal support from the government.
Murado disagrees, saying that “of course nobody in Spain took the downgrade as a compliment – and probably the country deserves it – but for a different reason, and not because of Spain’s banking system, the downgrade motive cited by the rating agency. The country’s banking system is not in good shape, but the situation with the banking system in Spain is no different than in many European countries. The other serious problem is growth – the lack of it, to be more precise. That would be a more likely reason for the downgrade. So the rating cut is understandable as a move, but for the wrong reasons.
Now Europe’s fourth-largest economy is rated at the same level as Ireland and Italy, which are also struggling with debt problems.
Meanwhile, experts believe the Spanish economy is likely to show some improvement in the next few years. “All indications are that Spain will remain in recession until the end of the year, and minimal growth is expected as early as in 2013,” says Anna Bodrova from Investcafe.
But the country probably won’t meet its 2012 budget deficit target of a 5.3%. “Currently this level is beyond Spain’s grasp,” says Bodrova. “The best result they could expect is 6.-6.3%.”
However, Spain recently revealed that borrowing costs surged despite a 27.3 billion-euro austerity program announced by the government late last month. Meanwhile, the country’s authorities pledge Spain won’t follow Greece and ask for financial help.