Spain’s Outlook Kept Negative at Two Levels Above Junk by FitchCraig Stirling
Spain kept an investment-grade rating at Fitch Ratings, which said its debt will peak below 100 percent of gross domestic product and that the government still has some room for maneuver in the event of further shocks.
The country remains at BBB, two levels above junk, and the outlook is still negative, the credit-ratings company said in a statement in London yesterday. It predicted that debt will peak at 96 percent of GDP in the 2014-15 fiscal year and then decline “gradually.”
The rating “reflects Fitch’s opinion that the sovereign maintains some fiscal headroom, albeit significantly reduced,” Fitch said. “Spain’s rating is lower than that of other large advanced economies, reflecting the relatively large risks to creditworthiness posed by its economic and financial adjustment within the euro zone.”
Fitch’s rating on Spain is one level higher than those of Standard & Poor’s and Moody’s Investors Service, which both have the country graded at one level above junk. Investors often ignore ratings, evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011.
Fitch said the negative outlook on Spain reflects risks including a failure to shift its public debt ratio down in the medium term, uncertainty about its economic and fiscal policy, a worse than expected recession, and the threat of an intensification of the euro-area debt crisis.
Fitch said that Spain’s “deep recession” will continue this year and it forecast that the economy will begin to recover in 2014 “as headwinds from fiscal austerity and financing conditions ease.”
“The fiscal deficit will take several more years to be eliminated in structural terms,” it said. “Growth prospects are uncertain, all sectors of the economy are relatively indebted and unemployment is exceptionally high.”
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published on Dec. 17. Investors ignored 56 percent of Moody’s Investors Service rating and outlook changes and 50 percent of those by S&P. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.