Euro plunges as Spain’s debt downgraded

Saturday, May 29, 2010
By Paul Martin

Gráinne Gilmore
May 28, 2010

The euro plunged and US stock markets dived last night after Spain was stripped of its top-level credit rating by a leading rating agency over concerns about its economic growth.

In the latest blow to the eurozone, which is struggling to cope with the fallout from the Greek fiscal crisis, Fitch Ratings downgraded Spain’s sovereign credit rating — a measure of how easily it can meet the interest payment on its debt — by a notch from the top AAA rating to AA+.

Standard & Poor’s, another ratings agency, downgraded Spain’s rating for the second time to AA last month but Moody’s, the other leading agency, has maintained the rating at AAA.

Any downgrade in a sovereign credit rating will push up the interest that a country must pay on its debts. Brian Coulton, Fitch’s head of EMEA sovereign ratings, said that the process of cutting the country’s debt could slow economic growth.

Fitch queried Spain’s forecasts for economic growth, highlighting that the inflexibility of the labour market and the restructuring of regional and local savings banks could act as a drag on growth.

Investors were unnerved by the move, sending the Dow Jones industrial average of leading US shares plummeting by 122.3 points, or nearly 1.19 per cent. The Standard & Poor’s 500 index suffered its worst monthly decline since February 2009.

The euro slumped against the dollar after investors abandoned it in favour of the greenback, sliding to $1.2285. It also fell against the pound, dropping to 85.04p, down from 85.40p.

Analysts said that the full effect of Fitch’s announcement, which came after the European markets shut last night, would not be felt until Monday.

John Praveen, the chief investment strategist at Prudential International Investment Advisers, said: “The markets are reacting negatively. If Moody’s also downgrades Spanish debt then we will probably have a very negative reaction because Spain is considered much bigger than Greece.”

Spain’s debt was 40 per cent before the financial crisis in 2007. Britain’s national debt is 62.1 per cent of GDP.

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