Blogging from the Highlands of Scotland until I return to the Murcia region of Spain
in the Autumn for a month or so

'Fair and softly goes far' - Miguel de Cervantes

Tuesday, 13 January 2009

Spain's 'Sovereign Debt' ratings under scrutiny

Yesterday's shock news is that one of the major ratings agencies, S&P, is contemplating (FT article) a revision downward of Spain's sovereign debt ratings; the immediate result in the markets was a widening in the spread between Spain's 10 year government bonds and those of Germany to its widest level since the launch of the Euro in 1999. This followed on from last week's warning that S&P was considering similar downward revisions of the sovereign debt of both Greece and Ireland.

The one positive factor in Spain's case is that it is, as the FT article points out, better placed to take on higher budget deficits than many other Eurozone countries (as a way of 'buying its way' out of recession) because it maintained budget surpluses during its many years of strong economic growth and as at the end of 2007 it had public debt of only 36.2 per cent of GDP, according to Eurostat.

It is noticeable that the Euro is trading off its end-2008 highs in recent days against other major currencies; a British right-wing and highly Eurosceptic newspaper columnist, Simon Heffer, has been writing (scroll down the page to the section headed 'I'm loath to say I told you so but...') about a possible 'correction' of the Euro/Sterling rate in recent weeks, to counteract the recent severe fall in the value of Sterling - time will tell; I often disagree strongly with what he writes, but this time I think he may well have a point as the only thing that seems to have strengthened the Euro against Sterling is possibly hysterical market sentiment, not that both the Eurozone and Sterling economies (not to mention the Dollar economy) are all in a mess, that is undisputed, unfortunately - on the other hand the Eurozone doesn't have Gordon Brown running its financial affairs (unlike the UK) so that must be a point in its favour, specially whilst the ECB countinues to be bound by the pretty strict rules laid down by Germany's Bundesbank at the Euro's inception as a condition of Germany joining the Euro. It is being speculated here that the European Central Bank may reduce Euro interest rates, so reducing the yield differential as against USD instruments - the Spain Economy Watch blog also has a great deal more commentary about how these and other factors may affect economic prospects in Spain and in other Eurozone countries.

Hold on to your hats folks; the ride has only just started - it could get much more bumpy.

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