UPDATE 2-Fitch cuts Spain’s ratings, markets tumble

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By Sonya Dowsett

MADRID, May 28 (BestGrowthStock) – Fitch Ratings cut Spain’s credit
ratings to AA+ from AAA on Friday, saying its economic recovery
would be more muted than the government forecast, pushing world
equities and the euro lower.

The downgrade follows a cut by another agency Standard and
Poor’s last month and heaps more pressure on the government,
battling to reassure markets its fiscal, political and social
woes will not end up in a Greek-style debt crisis.

Fitch said Spain’s deleveraging of record-high levels of
household and corporate debt and growing levels of government
debt would drag on economic growth.

“The downgrade reflects Fitch’s assessment that the process
of adjustment to a lower level of private sector and external
indebtedness will materially reduce the rate of growth of the
Spanish economy over the medium-term,” Fitch’s analyst Brian
Coulton said in a statement.

It kept its outlook stable.

The downgrade by Fitch set off a new round of selling in
equities that were already lower. The euro fell (Read more about the trembling euro. ) as low as
$1.2284 (EUR=EBS: ), near a session low.

Europe’s clumsy response to a Greek debt crisis and big
deficits in other euro zone countries have unnerved markets over
the past six weeks and raised doubts about the viability of the
euro.

“The markets are reacting negatively,” said John Praveen,
chief investment strategist at Prudential International
Investments Advisers in the United States. “The European debt
problem is going to continue to have a shadow on the markets.”

Fitch said Spain’s current government debt would likely
reach 78 percent of gross domestic product by 2013 from under 40
percent before the start of the global financial crisis in 2007.

Spain’s government debt is forecast to hit 65.9 percent of
GDP by 2010, around half that of Greece.

The inflexibility of the labour market and the restructuring
of the unlisted savings banks would hinder the pace of
adjustment Fitch said.

The Spanish government is struggling to agree crucial labour
reforms with unions and the threat of a general strike. It just
managed to pass a strict austerity package on Thursday by a
single vote.

S&P downgraded Spain’s ratings one notch to AA from AA+ with
a negative outlook on April 28, saying it expected the euro
zone’s fourth biggest economy to grow only slowly in the next
few years.

Some commentators on Friday said the downgrade was not
unexpected, and drew comfort from positive comments from the
agency about Spain’s sovereign credit profile remaining strong
and its sound financial sector.

“The stable outlook should be a good sign, it shows the
situation is only worth a downgrade, but this is about as good
as the bad news is going to get,” said Dirk Schnitker, a
Madrid-based analyst at CM Capital Markets Bolsa.

Moody’s is the only agency that has not downgraded Spanish
sovereign credit rating and still gives it a rating of AAA.

Stock Investing

(Additional reporting by Tracy Rucinski and Nigel Davies;
Editing by Ron Askew)

UPDATE 2-Fitch cuts Spain’s ratings, markets tumble