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Fitch downgrade caps miserable week for Spain
World equities slid and the euro fell below $1.23 after the downgrade, which stoked fears that Spain, the euro zone’s fourth largest economy, could suffer a crisis similar to the one which forced Greece to agree a 110 billion euro rescue with the EU and IMF earlier this month.
Because the Spanish economy is far bigger than Greece’s, a crisis there would have far more serious implications for the 16-nation euro zone and global growth.
“Spain is the 800-pound gorilla in the room,” said Win Thin, a senior currency strategist at Brown Brothers Harriman in New York.
Fitch is the second agency to cut its rating on Spain after Standard & Poor’s downgraded the country last month. In addition to the debt woes, Fitch cited the inflexibility of the labor market and the cost of restructuring Spain’s network of unlisted savings banks as hurdles to recovery.
The Spanish economy hit a wall when a housing bubble fuelled by cheap credit burst. It was the only major economy in Europe not to emerge from recession last year.
The Spanish government said on Friday that talks with unions to agree an overhaul of labor market rules were not going well and that if necessary it would push a reform of workplace laws through parliament.
Unions have threatened a general strike if Socialist Prime Minister Jose Luis Rodriguez Zapatero’s government pushes ahead with a reform to cut the cost of hiring and firing without their consent.
In order to reassure markets about the country’s long-term solvency, the government was set to make a last-ditch attempt to clinch a deal in three-way talks at the weekend that will also include employers.
The prospect of industrial strife piles further pressure on Zapatero, whose government averted a bullet on Thursday by winning passage of a 15 billion euro ($18.4 billion) austerity package by a single vote in parliament.
A week after cutting its 2011 growth forecast to 1.3 percent from 1.8 percent, the government on Friday revised down its growth estimates for 2012 and 2013 to 2.5 percent and 2.7 percent, respectively.
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