Credit Agency Fitch cut its rating on Spain’s government debt three levels from A to BBB, two notches short of “junk” status and placed the country on “negative outlook” because of the absence of a credible vision for the euro.
The lowered credit rating places the fourth largest economy in the euro zone closer to receiving an international bailout.
Fitch said “policy mis-steps at the European level” and an “absence of a credible vision” for the euro had resulted in a “dramatic erosion of Spain’s sovereign profile.”
“The absence of a credible vision of a reformed [monetary union] and financial ‘firewall’ has rendered Spain and other so-called peripheral nations vulnerable to capital flight and undercut their access to affordable fiscal funding,” the Fitch report said.
Higher Bailout Cost
Fitch said the cost of Spain bailing out its banks is likely to cost around €60bn but could rise to as much as €100bn or or 9% of gross domestic product. That is more than three times higher than the €30bn in its last estimate.
Expectations are now higher that Spain’s leaders will have to seek an international bailout for their vulnerable banks still heavily weighed down by underwater real estate loans and an contracting economy with high unemployment levels that aggravates future mortgage losses.
Spain had record high unemployment of 24.3% in April, the highest in the 27-nation European Union.
“Spain’s double-dip recession will accelerate the domestic banks’ accumulation of problem assets in 2012 and 2013 and significantly lift associated loan losses,” Fitch said.
Despite fears expressed on Tuesday by Spanish Treasury Minister Cristobal Montoro that Spain was being shut out of credit markets, Spain managed to sell €2 billion ($2.52 billion) in bonds Thursday, although they had to pay investors much higher rates than in previous bond sales.
On Thursday German Chancellor Angela Merkel met with British Prime Minister David Cameron to discuss the financial crisis.
The two leaders agreed that the European Union’s fiscal pact was insufficient to solve the region’s debt crisis alone. Merkel used the joint press conference with Cameron in Berlin to make vague references that Germany is ready to use the euro zone’s full machinery to support Spain.
“We have created the instruments for support in the euro zone and that Germany is ready to use these instruments whenever it may prove necessary” Merkel said.
However, Merkel did not provide any clear or specific details about the type of instruments that she plans to use to support Spain’s financial woes.
Earlier this week U.S. President Barack Obama and other international leaders telephoned euro zone’s leaders to express concern about the worsening financial crisis and make an appeal for more decisive action before the EU summit on June 28-29.
Merkel explained that progress towards a fiscal and banking union would take substantially longer.
In a television interview with ARD Merkel replied, “I don’t believe that there will be one single summit that will decide on a big bang,” she said.
“But what we have been doing for some time, and on which a working plan will certainly be presented in June, is to say we need more Europe.”
“Whoever is in a currency union will have to move closer together. We have to be open to make it possible for everyone to participate. But we cannot stand still because some do not want to go with us,” she reported.
European Council President Herman Van Rompuy, the chairman of EU summits, said he would only present “building blocks” on closer euro zone fiscal and banking union at the EU Summit at the end of June with the goal of having detailed proposals in October.
Bailout On the Way?
It remains unknown if Germany will back a proposal to allow euro zone bailout funds to be sent directly to indebted Spainsh banks rather than going through the Spanish government along with austerity strings which is the most common way for bailout funds to be accepted during a financial crisis.
But Spain has already undertaken austerity within their government.
Spanish PM Mariano Rajoy has asked for the European Financial Stability Fund (EFSF) and the European Stability Mechanism (ESM) to be permitted for lending directly to his country’s indebted banks.
ECB President Mario Draghi had previously said the bail-out funds (EFSF and ESM) do not have the required mandate to bail-out banks.
However, provisions of the EFSF’s “precautionary programme” could still be used to help Spain without a full bail-out package containing more austerity for Spain.
Bloomberg reports that EU Finance Ministers will conduct a week-end call to discuss Spanish aid.