World Business

Spain surprised by S&P's debt downgrade move

By Emma Ross-Thomas and Francine Lacqua (China Daily)
Updated: 2010-04-30 10:37

MADRID: Spain is "surprised" by a downgrade from Standard & Poor's, which is based on overly pessimistic growth forecasts, said Jose Manuel Campa, the country's deputy finance minister.

S&P cut its rating on Spanish debt to 'AA', putting the nation that was 'AAA'-rated until January 2009 on a par with Slovenia, as it said Spain is underestimating its fiscal problems and overestimating its ability to grow.

He said that his country will have no trouble financing a 16.2 billion euro ($21.3 billion) bond redemption in July and won't need to ask for European Union aid as Greece has.

Campa said that Spain would have no problems "at all" financing the redemption, which is the next bond to fall due.

Asked if there was any chance Spain would need EU financial help, he said "no". The risk premium on Spanish debt rose to the highest in more than a year and the cost of insuring its debt against default reached a record as concerns about Greece's ability to pay bondholders spilled over into Spanish and Portuguese markets.

Campa said the rating move won't change Spain's borrowing plan for this year. It will continue to issue a 15-year bond "to ensure it has enough liquidity in the market" and may sell debt in dollars, he said.

"We have been observing all through our issues throughout the year strong demand for Spanish paper and we expect that to continue," he said in a Bloomberg Television interview in Madrid on Thursday.

"We're planning to continue the funding program throughout the year regularly."

Spanish bonds fell on Thursday for a ninth day, pushing the extra interest investors demand to hold Spanish debt instead of German bunds to 114 basis points, the highest in more than a year.

The surge in Spain's bond yields is due more to the situation in Greece than Spain's economic fundamentals and there's "no reason to think that these spreads will remain," Campa said.

"Contagion worries me only to the extent that it could be enduring", said Campa, a former professor at New York's Stern School of Business.

Spain is sticking to its forecasts for growth of 1.8 percent in 2011, 2.9 percent in 2012 and 3.1 percent in 2013. High borrowing costs would have to "endure over time" to force a lower revision of growth or budget forecasts, he said.

S&P's estimate that growth will average 0.7 percent a year from 2010 to 2016 is "extremely low and clearly on the lower bound of the ranges being provided by all international private analysts", Campa said. The International Monetary Fund sees Spain growing 0.9 percent in 2011, accelerating to 1.8 percent in 2014.

Bloomberg News

(China Daily 04/30/2010 page14)