Spain credit downgrade

With finance ministers and central bankers from the world's 20 biggest economies due to meet in Paris this Friday, the ratings agency Standard & Poor's has downgraded Spain's long-term debt by one point to AA-.

Standard & Poor's (S&P) shifted attention from the country's sovereign debt to also blame private-sector debt - held by the public with things like personal loans and credit cards.

It also cited Spain's high unemployment rate - currently over 20 percent - as a reason for the downgrade.

"We see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions ... and the likely economic slowdown in Spain's main trading partners," S&P said.

It's a turnaround on S&P's forecast in February, when it predicted 1.5 percent growth for Spain in 2012.

Asian echo

Asian markets reacted negatively after the Spanish downgrade as it added to fears that the eurozone debt crisis will grow.

It was not the first time this week.

On Wednesday, markets in Asia also slowed when Slovakia voted against the European Financial Stability Facility (EFSF) - a reforms package that is seen as vital for the eurozone to help its failing economies.

The German Chancellor Angela Merkel was on an official visit to Vietnam at the time and hinted that - while she was confident the EFSF would eventually be passed - it would probably have to be expanded before long.

The next day Slovak parliamentarians returned to the ballot to vote in favour of the EFSF. But the forecast for Europe remains grim.

Like the ratings agency Fitch, which downgraded Spain to AA- last week, S&P says further downgrades are possible and Spain could slip into recession by next year.

Fitch Ratings has this week warned that European banks are also under threat.

Germany's biggest lender, Deutsche Bank, is among 13 banks that Fitch says may have credit or viability grades cut.

Goldman Sachs, Morgan Stanley and Credit Suisse were also among firms whose "business models are particularly sensitive to the increased challenges," said Fitch in a statement on Thursday.

Global contagion

All this is expected to play into the G20 summit in Paris on Friday.

Finance ministers and central bankers from the world's 20 top economies will discuss ways to strengthen the eurozone and support the global economy to stop it dipping into recession itself.

Spain's credit downgrade has intensified the challenge for the G20 chiefs, and has prompted the French finance ministry to suggest that the "absolute priority" for the Paris meeting is to find ways to stabilize the eurozone.

The Canadian Finance Minister Jim Flaherty went further before leaving for Paris on Thursday, telling reporters that eurozone actions so far were short of what was needed.

But Europe is still deciding what it needs.

France and Germany hope to see a crisis resolution plan take shape before a European Union summit on October 23. But these two major players appear to be taking their time to agree on how to recapitalize banks and on whether the zone can take another round of losses for Greek bondholders.

While Spain, Italy and others have entered the mix, it is fears about Greece defaulting on its debt that continue to trouble global markets most.

Since July, global stocks have fallen by 17 percent from a high in May - with the DAX in Frankfurt down over 20 percent in the same period.

At the same time, the latest figures show eurozone inflation jumped by half a percentage point to 3 percent in September - which is above the 2 percent target set by the European Central Bank.

Author: Zulfikar Abbany (AFP, Reuters)
Editor: Mark Hallam