Fitch Ratings slashed Spain’s sovereign credit rating by three notches last Thursday, citing ballooning estimates of the cost of a banking crisis, mushrooming debt and a deepening recession.
The long-term rating was chopped to BBB from A
The long-term rating was chopped to BBB from A and left with a negative outlook, said Fitch, swooping as expectations mounted that the EU would have to throw a lifeline to Spanish banks.
“The likely cost of restructuring and recapitalising the Spanish banking sector is now estimated by Fitch to be around €60 billion and as high as €100 billion in a more severe stress scenario,”it said.
That was more than double its previous estimate that the banking sector, stricken by its vast exposure to the collapsed property market, would need €30 billion.
A bank rescue would also push up the state’s total accumulated debt at a rapid pace, Fitch said, warning that gross general public debt would likely peak at 95 per cent of total economic output in 2015.
“Spain is forecast to remain in recession through the remainder of this year and 2013 compared to Fitch’s previous expectation that the economy would benefit from a mild recovery in 2013,” the agency said.
The country’s level of foreign debt also made it “especially vulnerable” to contagion from the crisis in Greece, where a general election on June 17 could see the country forced out of the eurozone if a new government refuses to abide by austerity provisions agreed in return for a bailout.
At the same time, Spain faces rising costs to raise money on the markets, making international bailout for the financial sector more likely, it said.
Spain raised €2.07 billion in a bond auction earlier in the day but had to pay a high price, with the 10-year bonds fetching more than six per cent – a rate widely regarded as unsustainable over the longer term.
“The much reduced financing flexibility of the Spanish government is constraining its ability to intervene decisively in the restructuring of the banking sector and has increased the likelihood of external financial support,” Fitch said. European blunders carried much of the blame for Spain’s woes, it said.
“The dramatic erosion of Spain’s sovereign credit profile and ratings of the last year in part reflects policy missteps at the European level that in Fitch’s opinion have aggravated the economic and financial challenges facing Spain as it seeks to rebalance and restructure the economy,” it said.
In particular, it complained of the absence of a “credible”European financial firewall that left Spain and other vulnerable eurozone nations vulnerable to capital flight and made it harder for them to borrow on the markets.
Latest Bank of Spain figures showed a net €97 billion of investors’ money fled Spain in the first quarter of this year, a record.