S&P Cuts Spain’s Credit Rating, Fears for Europe Return

Another European country experienced a downgrade of its credit rating. This Standard & Poor’s cut the sovereign rating of Spain, reminding traders that the story of Europe’s woes is far from over and the debt crisis may spread across the region.

S&P lowered the long-term rating on the Kingdom of Spain to AA- from AA, maintaining the short-term ratings at A-1+. The outlook is negative. The rating agency cited the reasons for such decision:

-Spain’s uncertain growth prospects in light of the private sector’s need to access fresh external financing to roll over high levels of external debt amid rising funding costs and a challenging external environment;

-The likelihood of a continuing deterioration in financial system asset quality as reflected in the recent revision of our Banking Industry Credit Risk Assessment score for Spain to group 4 from group 3 (see “Spain
Banking Industry Country Risk Assessment Revised To Group 4 From Group 3 On Heightened Economic Risk”, published Oct. 11, 2011);

-The incomplete state of labor market reform, which we believe contributes to structurally high unemployment and which will likely remain a drag on economic recovery.

The announcement of the agency was a harsh reminder for those Forex market participants who became overly optimistic about the ability of the European Union to emerge from the crisis without a great harm. For those traders, who remained skeptic about the promises of the EU leaders to deal with the issues, the downgrade of Spain was yet another proof of the high risk to the European financial system.

EUR/USD fell from 1.3776 to 1.3737 today as of 00:42 GMT. EUR/JPY declined from 105.93 to 105.70 and EUR/GBP went down from 0.8737 to 0.8729.

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