Spain today became the third euro zone country since Friday to be warned by Standard & Poor's rating agency that its credit rating is under threat from the global credit crisis that continues to wreak havoc in Europe.
Just as in the case of Ireland and Greece last Friday, S&P said Spain faces a painful rebalancing of its economy and a marked deterioration of its public finances.
The gloomy news further extended the euro's losses against the US dollar and the yen today, and Fitch Ratings also weighed in by saying Ireland's debt grades could be hurt by the country's ballooning budget deficit.
Spain, like Ireland, haa both been hit hard by the collapse its property boom, contributing to burgeoning unemployment and shrinking government revenues.
S&P said Spain's credit-driven economy was particularly ill-equipped to cope with the global slowdown and risked years of weak growth.
"The Creditwatch placement reflects our view of the significant challenges facing the Spanish economy as it traverses a period of very weak growth," Standard & Poor's said in a statement.
Following a slew of data pointing to a worse-than-expected euro zone recession, some analysts said the S&P warnings could heighten expectations for a large rate cut by the European Central Bank.
The Spanish 10-year government bond yield spread stayed near historic wides against benchmark German Bunds after S&P said it might cut Spain's "AAA" rating.
The Spanish/Bund spread was last at 92.3 basis points, having reached 92.6 points -- the widest since at least 1999, according to Reuters charts.
With a wave of government bond issues to swamp international markets this year, Spain, Ireland and Greece could find themselves paying sharply higher prices if their ratings fall.
Spain alone plans to increase 2009 debt issuance 51 per cent to €104.5 billion in 2009 to cover its fiscal deficit.
On top of that, it must issue debt to cover up to €50 billion in bank assets purchases meant to boost liquidity and kick start lending to firms and families.
Spain's government did not expect S&P to carry out its threat and said it would put public accounts in order.
A Creditwatch listing signals a potential but not inevitable downgrade.
"The economic policy of this government is precisely aimed at overcoming those imbalances which lead S&P to that situation of creditwatch," said an economy ministry spokeswoman.
Spain was the first large European economy to launch an economic stimulus package last year as the collapse of its decade-long housing boom coincided with the global credit crunch.
Despite over €60 billion euros in tax breaks and emergency credit, Spanish unemployment soared by one million in 2008 to reach the highest rate in the European Union at 13.4 per cent in November.
A further one million workers are expected to lose jobs in 2009 and some economists do not expect the construction and credit-fuelled economy to return to growth until 2011.
Standard & Poor's said Spain's government had to cut public spending in line with lower government revenues and forecast its deficit would breach an European Union limit of 3 per cent of GDP until 2011, peaking above 6 per cent in 2009.
Reuters