Rating cut puts Spain back on crisis radar

7:18 PM crisis, radar, rating, Spain No Comments

MADRID (Reuters) - Standard & Poor's cut Spain's credit rating Friday, sending the euro briefly lower and underlining the challenges facing Europe's major powers as they meet G20 counterparts over the euro-zone debt crisis.

S&P, whose move mirrored that by fellow ratings agency Fitch last week, cited high unemployment, tightening credit and high private-sector debt among reasons for cutting the nation's long-term rating to AA- from AA.

Spanish 10-year government bond yields rose slightly in response, although they remained almost 60 basis points lower than those of Italy and, at 5.27 percent, some distance from the 7 percent level widely regarded as unsustainable.

"Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain's main trading partners," S&P said.

It also noted the "incomplete state" of labor market reform and the likelihood of further asset deterioration for Spain's banks, and downgraded its forecast for Spanish economic growth in 2012 to about 1 percent, from the 1.5 percent it forecast in February.

High yields on Spanish government bonds point to concerns that it could be the next euro zone economy to require a Greece-style bailout, and despite an unpopular austerity program, doubts remain that Spain will meet its deficit target of 6 percent of GDP this year.

The Financial Times quoted a senior Spanish official as saying that meeting the 6 percent deficit target would be "difficult."

But Spain's Economy Minister Elena Salgado said later on Friday that there would be some margin for maneuver this year thanks about 2 billion euros raised by an auction of wireless frequencies and lower interest payments.

"Interest payments by the central government will be at least 2 billion euros below budget. So the combined effect of the spectrum auction and lower interest payments will mean we have a margin of 0.4 percent (of GDP)" Salgado said.

BETTER PIIGS

S&P announced the downgrade as finance ministers and central bank chiefs from the world's 20 biggest economies were due to meet later Friday in Paris amid pressure to find an urgent and convincing solution to the deepening debt crisis.

Spanish unemployment, at 21 percent, is the highest in the European Union, reflecting a stagnant economy, the collapse of a decade-long housing boom and cuts aimed at taming a public sector deficit that reached 11.1 percent of GDP in 2009.

The decision to shelve multi-billion-euro privatization plans, mainly due to tough market conditions, has meanwhile deprived the state of much needed revenues.

"The market's perception of Spain is that it's in a stronger position (than other debt-laden states) - with a strong defense on bank capitalization in place from the FROB bad bank fund, aggressive government action to control and cut spending and a 70 percent debt/GDP ratio," said Bill Blain, senior director at broker NewEdge Group.

"The biggest problem, but the issue I read least about, is the unresolved crisis between central government making cuts and the reticence of regions to follow," he said.

Salgado said the government will shortly announce its plans to ensure Spain's heavily-indebted regions meet their tough 2011 deficit targets.[nE8E7L700E]

JOB DILEMMA

A botched labor market reform in 2010 did little to alleviate joblessness that is concentrated mainly amongst younger Spaniards, and a new government after November 20 general elections will be under pressure to tackle the issue.

The center-right People's Party is expected to win the election easily and deepen austerity measures but they have shied away from presenting specific policy measures for fear of eroding public support.

Like Fitch, which also now rates Spain at AA-, S&P signaled further possible downgrades for Spain, saying there was still a risk the euro zone's fourth-largest economy could slip into recession next year, with a 0.5 percent contraction.

The euro reached a session low of $1.3723 after the downgrade, but later recovered on reports the European Central Bank was buying Spanish and Italian debt.

Hopes that G20 officials would agree on the outlines of a plan to resolve the debt crisis ahead of a European Union summit on October 23 also buoyed the shared currency, which remained on course for its biggest weekly rally since January.

Spain's blue chip index was little affected by the rating cut.

Finance chiefs from outside the euro zone are expected to speak frankly when they meet their European counterparts at Friday's G20 meeting, given impatience growing over the crisis and its implications for the rest of the world.

Thursday, Fitch cut credit ratings or signaled possible downgrades for several major European banks. It downgraded UBS and Royal Bank of Scotland. It also placed Barclays Bank, BNP Paribas, Credit Suisse, Deutsche Bank and Societe Generale on watch negative.

(Reporting by Balazs Koranyi, Mark Bendeich, Elisabeth O'Leary and Judy MacInnes; Editing by Catherine Evans and Patrick Graham)

Copyright 2011 Thomson Reuters.

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Central Bank buys bonds for Italy, Spain

1:34 PM bonds, central, Italy, Spain No Comments

ANN CURRY, co-host: this morning on the today's money, to protect your retirement. Many Americans are concerned in view of recent dive on Wall Street and the first ever to downgrade credit rating the Government. What does it mean for all of you? Now, Farnoosh Torabi carries on Yahoo! Finance and also the author of "psyche himself rich." Farnoosh, good morning. Mrs FARNOOSH TORABI (author, "Psych is rich"): good morning, Ann

CURRY: how is the question that I think a lot of people are calling for now as this downgrade is their personal savings, their portfolios? Is there a simple answer?

Mrs TORABI: Well, that's the economic answer to downgrade to debt to us, is on the Government level, at the level of consumers on the main street mean higher interest rates on consumer credit, car loans, your credit cards mortgages down to drop. Theoretically, these interest rates could rise following a downgrade. Thus put personal savings under pressure, because the more you have to pay to borrow, the you can less you want to save.

CURRY: But we have no idea, how much they, may go in view of the fact that the two other agencies, credit rating agencies have not actually lower currently and also... Mrs TORABI: Right.

CURRY:..... .because the White House argument, that in fact S & P is actually a bug, a $2 trillion mistake made.

Mrs TORABI: Right. CURRY: is I mean, it doubts about how much, or even, if the interest rates will rise?

Mrs TORABI: sure. Well, that's a good point. It have to do only an agency, which now is we have downgraded US debt, the consequences will be not so difficult. I don't think that we go to see interest, prices to explode. But here is the other thing, Ann, this downgrade it unprecedented is. It has added uncertainty in financial markets, so that we increase prices for everyday goods can see because companies want to have to the kind of pre-emptive strike against what may be the worst on the road from an another recession is happening. So we will see, can increase prices on oil, gas, food, clothing, ultimately personal savings can be affected.

CURRY: So are you really say that while we do not know that we should protect ourselves really, it sounds like what you're saying. Mrs TORABI: absolutely. You can't control what is happening in DC, but you can specify that your ability to save money.

CURRY: OK, talk to save you money. Our 401 (k) s wife TORABI: Yes. CURRY: Those of us who are lucky enough to have it, what can we do?

Mrs TORABI: You want not to emotion-driven knee-jerk movements in your 401 (k). Keep in mind that a long-term investment vehicle, the right is your 401 (k)? And as long as you are diversified, you have a risk-adjusted portfolio, which means that your portfolio speaks, your age and if you want to go to retire. This is really important. I think everyone should be a moment and see how their distribution is distributed. Make sure that when you young, you know you can afford more risk. You should be on the market. If retirement approach to, you're in your 60s, more in the direction I fixed-income investments, like bonds, CDs call you want to, be associated with, because you the guesswork of the return on your investment.

CURRY: So they are less likely vary is what you're saying.

Mrs TORABI: Yes. Yes. CURRY: How is that a safer bet. So depending on how old you are, how quickly you need your money...

Mrs TORABI: Right. CURRY: ….. .then you can decide whether you can move your money and choose some of these want safer places to go. Mrs TORABI: exactly. Once a year I think is a good time to check. It could be. CURRY: definitely. Mrs TORABI: in any case. CURRY: OK. How much should people stay out of this market, but think?

Mrs TORABI: Mm-hmm.

CURRY: I mean, some people will say, 'Hey, this could be chance", other people who say, 'are you crazy?' Art Mrs TORABI: Right.

CURRY: I would think that upturn - what your best advice, about the average American?

Mrs TORABI: I would say, you think about your five-year plan. What objectives you want in the next five years taken, whether it sends your kids to school, a House to buy, starting a business. Do what the price tags that are associated with these objectives and sure what must also always money, you reach these milestones, you take it from the stock exchange since five years, is not truth be told, enough time to really the volatility, to lose the money. Five years, which I think is a long enough time to progress to all these losses in order for you with your life to scoop.

CURRY: So this is a good rule of thumb.

Mrs TORABI: Yes. CURRY: Now, you know, it seems as if we all hear these experts, you know, Web - on CNBC...

Mrs TORABI: Mm-hmm. CURRY:..... .or just type von-- and analysts in General seem kind of get you a clue they know that the market goes, diving or not...

Mrs TORABI: Right. CURRY:.. .depending up - what is the best advice you can on average Americans like to know if things be not so good?

Mrs TORABI: Well, I think that even the best investors do not really know on a daily basis. But this is something that wirklich-- I have this in my book wrote, recessions, Ann, happen approximately every five to six years.

CURRY: Hm.

Mrs TORABI: look back on as early as 1797, the great panic, as our country went into a credit crisis along with England. Had since then we have again every five to six years, kind of a recession, which is why I say, have a five year plan, and keep the money in saving or contraction.

CURRY: It means also, that we actually recessions, to stop... Mrs TORABI: Right.

CURRY:.. .pretty frequently. Mrs TORABI: We have very cyclical. CURRY: OK, Farnoosh Torabi, thank you so much for a good Council this morning. Mrs TORABI: Gern happen.

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