S&P cuts Spains credit rating – MarketWatch

On the heels of reading this from MarketWatch…

MADRID MarketWatch – Spains sovereign credit rating was cut to AA+ from AAA Monday by Standard & Poors Ratings Service. “The downgrade of the sovereign reflects our expectations that public finances will suffer in tandem with the expected decline in Spains growth prospects, and that the policy response may be insufficient to effectively counter the related economic and fiscal challenges,” S&P analyst Trevor Cullinan said in a press release.

via S&P cuts Spains credit rating – MarketWatch.

I could only think of this song for some reason…

Well, actually there are several reasons this song came to mind. First, it’s the idea that sovereign risk is increasing. Spain’s AAA rating is gone, and given their prospects for declining GDP, it’s not a good candidate for an upgrade. Second, Spain’s downgrade follows Greece’s one notch downgrade from A to A- that S&P last week.

It can only be a matter of time (weeks, months) before the rest of the PIIGS are downgraded as well. That would include Portugal, Italy, and Ireland. Indeed, the IMF has described Portugal’s budget situation as “critical.” From Asia One:

The International Monetary Fund on Wednesday warned Portugal of the “critical” importance of getting its public finances in order, as fears over rising debt levels in the eurozone hit markets.

“Fiscal consolidation is critical to prevent further deterioration and preserve hard-won credibility,” the IMF said in a report on the Portuguese economy, urging Portugal to rein in public sector salaries and social spending.

With a deficit of 8 percent of GDP, it’s the most egregious offender of the Maastricht Treaty, but an offender it is nonetheless. Again, as in the case of Greece, this represents another test for the triumvirate at Brussels, Frankfurt, and Berlin. Will they have the stomach to allow these countries put the collective currency at risk for the entire Eurozone?

I think we’re about to find out…

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