Spain Credit Rating Downgraded, Faces 'Crisis Of Huge Proportions'

* S&P downgrades Spanish government debt

* Unemployment rate rises more than expected

* Retail sales continue to slide as recession grips

* Bank concerns bubble

By Nigel Davies

MADRID, April 27 (Reuters) - Spain's sickly economy faces a "crisis of huge proportions", a minister said on Friday, as unemployment hit its highest level in two decades and Standard and Poor's weighed in with a two-notch downgrade of the government's debt.

Spain's unemployment rate shot up to 24 percent in the first quarter, the highest level since the early 1990s and one of the worst jobless figures in the world. Retail sales slumped for the twenty-first consecutive month.

"The figures are terrible for everyone and terrible for the government ... Spain is in a crisis of huge proportions," Foreign Minister Jose Manuel Garcia-Margallo said in a radio interview.

Standard and Poor's cited risks of an increase in bad loans at Spanish banks and called on Europe to take action to encourage growth.

Bank shares dropped 3.38 percent and Spain's country risk, as measured by the spread on yields between Spanish and German benchmark government bonds, spiked by 10 basis points to 434 basis points.

Spain has slipped into its second recession in three years putting it back in the centre of the euro zone debt crisis storm.

The government has already rescued a number of banks that were too exposed to a decade-long construction boom that crashed in 2008, and investors fear vulnerable lenders will be hit by another wave of loan defaults due to the slowing economy.

With the economy shrinking, Spain has little hope of meeting tough public deficit targets this year even as the government makes tough cuts.

Conservative Prime Minister Mariano Rajoy, in office since December, has passed an austerity budget and introduced new laws to try to make the economy more competitive.

On Thursday Rajoy said he was determined to stick to austerity measures even though they are aggravating the economic slump and calls for growth measures are on the increase around Europe.

The unemployment rate was up from 22.9 percent in the last quarter of 2011. Half of Spain's youth is out of work, and figures are unlikely to improve for some time as government spending cuts this year worth around 42 billion euros hold back any potential for growth.

The government expects labour reforms passed in the first quarter that make it cheaper for firms to hire and fire to produce results next year. Many firms have taken advantage of new rules to lay off more staff.

"It's a very challenging situation. I don't think that the banks are cornered yet, but the government must come out soon to say how they will address them," said Gilles Moec, an economist with Deutsche Bank.

The downgrade put Spain's credit rating at the same level as Italy. S&P now has Spain on a BBB+ rating, which means "adequate payment capacity" and is only a few notches above a junk rating. Fitch and Moody's still rate Spain's sovereign with a "strong payment capacity".

S&P said it was likely the government would have to put more funds into banks and called on euro zone countries to better manage the sovereign debt crisis.

The government is considering whether to create a holding company for the banks' toxic real estate assets as investors have not been convinced by three rounds of clean-ups and consolidations in the financial sector. (Additional reporting by Sonya Dowsett and Inmaculada Sanz; Writing by Fiona Ortiz; Editing by Giles Elgood)

Comments

[l78lancer]

07:31 PM on 04/30/2012

Britan, Italy, Spain...

Republicans desiring austerity - note well.

[brklynivn]

08:29 AM on 04/29/2012

I thought all of this austerity was supposed to be a cure.

[Dodgers1]

05:07 PM on 04/28/2012

Spain tried to transition from fossil fuels to green energy at the snap of a finger. The result was the highest unemployment there ever. Extreme environmentalists want an immediate transition to green energy. Congress, for example, passed legislation to transition from incadescent light bulbs to florescent bulbs or LED bulbs over a reasonable period. If we change course suddenly, we'll end up like Spain. Here's a news article from AP:

"President Obama used Spain’s green initiative as a blueprint for how the United States should use federal funds to stimulate the economy. Obama’s economic stimulus package allocated billions of dollars to the green jobs industry. Much of that has been wasted as Solyndra and and several other “green” companies have filed bankruptcy.

Spain’s unemployment reached 22.8% which is the highest in 17 years. The “green” jobs myth helped cause the problem. A study released in January of 2010 showed that every “green job” created with government money in Spain over the previous eight years came at the cost of 2.2 regular jobs, and only one in 10 of the newly created green jobs became a permanent job.

From the study:

“Europe’s current policy and strategy for supporting the so-called “green jobs” or renewable energy dates back to 1997, and has become one of the principal justifications for U.S. “green jobs” proposals. Yet an examination of Europe’s experience reveals these policies to be terribly economically counterproductive".

[l78lancer]

07:39 PM on 04/30/2012

What's your point? Who ever said that green energy was to be implemented suddenly or rapidly? I bet the article doesn't mention that part of the reason that Spain invested in green energy was to compete with Germany. And I bet it also doesn't discuss the fact that that Bush Administration provided money for green energy technology.

You cited a lot of "quotes" but provided no actual conclusion. If this is supposed to be a condemnation of Obama because of what's happening in Spain you have failed miserably.

[Dodgers1]

09:11 PM on 04/30/2012

What a great rebuttal. Maybe you should be a consultant to Obama for his upcoming debates. That would definitely insure his defeat for reelection. If you didn't understand what I was saying, the left needs more brain power. Ever attend college? Unemployed?

[Watching rock grow]

09:23 AM on 05/01/2012

Where is the link to that AP article? What study and where is the link to that study you are quoting?

[stargazer13]

11:49 AM on 04/28/2012

looks like the bankers

visited them and their people Too !!!

Dear Spain look hard at Iceland before you sign on the dotted line :)

[HansB]

09:07 AM on 04/28/2012

Perhaps a little bit of light at the end of the tunnel: Libération reports that, facing the prospect of a Hollande victory in France, European leaders one by one are changing their minds about austerity and the fiscal compact. Even Merkel has just said that she is open to a growth strategy to replace austerity.

This would have been unimaginable a mere month ago.

[TAIsabel]

08:41 AM on 04/28/2012

This is a true tragedy. The last time I was in Spain (I have lived in for a year and visited Spain often since 1961), I was completely horrified by the unbriddled, outrageous and obviously self destructing building boom that took place in the South. As we drove through Spain in 2005, my husband and I came up with a new saying..." The cranes in Spain spill out onto the plain". All you could see for miles were huge construction sites. As I approached Ronda, I actually did not recognize it and turned the car around thinking I was in the wrong place. Granada, toledo, sevilla, ronda....they were all chocked by a moat of unattractive half built monsters.

Perhaps they could reduce their unemployment and restore the South to its beauty by hiring people to knock down the atrocities that were built under the "building boom". Also, I firmly believe that joining the Euro destroyed Spain. I said it 12 years ago and I say it again....the Euro was a huge blunder. This mistake is now coming home to roost.

[frank day]

09:07 AM on 04/28/2012

But where will German industrialists build their homes?

[briceverdi]

06:06 AM on 04/28/2012

Austerity measures often increases unemployment. This leads to less spending and a shrinking of the economy. The nation then goes into more monetary depression. Do Standard and Poors downgrade really help? No they just pave the way for greedy financiers to raise their interests rates.Spain needs to invest in its small businesses to overcome its financial problems.

[stalb427]

10:41 PM on 04/27/2012

All the americans on here should look at europe not as a sign of what not to do, but as a glimpse of what is coming to our home soon. We have allowed a corrupt corporation (The Federal Reserve) to counterfeit our currency for too long, and lately it has been to an extreme.

It is only a matter of time before the austerity measures start getting passed through the US government with out debt and unfunded obligations over $200 trillion, and doubt digit inflation on the way if not biting here in 2012.

Just look at gasoline, and how many here think its cause of expensive oil? Wrong, its all inflation oil is cheap right now has been for a few months. Well unless you calculate the cost in dollars then its constantly rising.

But see there is a much more traditional method for calculating somethings value that is stable and true its called gold. And you can get a barrel of oil for a decent percentage less gold that the 41 year average, which leaves only one culprit... the dollar is worth less.

http://www.forbes.com/sites/louiswoodhill/2012/02/22/gasoline-prices-are-not-rising-the-dollar-is-falling/

And gas is just one example, everything we consume will cost more. Suppose Mc D's will have to go with the 5 dollar menu.

[totalliberal]

12:19 AM on 04/28/2012

F&F

[stalb427]

09:58 PM on 04/27/2012

Wonder if any of the European leaders is familiar with the game domino's.....

[the81kid]

04:43 AM on 04/28/2012

Domino´s Pizza!

[rda1911a1]

08:49 PM on 04/27/2012

can't they just print more money and borrow from China like us?

[JBaker]

11:56 PM on 04/27/2012

No. They are hooked into the Euro, and that is the problem. Individual members are unable to regulate their economies. The Euro should probably be eliminated.

[TAIsabel]

08:48 AM on 04/28/2012

BINGO! From its inception, I said it would be a huge mistake. At that time, I was attacked verbally for my views by a German Spanish friend. This past year, he finally admitted to me that I was right.

[xturk937]

07:24 PM on 04/27/2012

Turkish economy is doing amazingly well and we'd like to help. I'd support three flamenco dancers between 20-30 from Granada in my home in a heart beat. ;)

[copperkettle3]

03:49 PM on 04/27/2012

This could be the destruction of the European Union eventually. Who is going to bail them out and accept their debt? This is also why a one world currency would not work.

[brklynivn]

08:35 AM on 04/29/2012

First of all, Europe is pretty well interconnected. How about just returning to the Europe before the Lisbon or even Mastricht Treaties? When Europe was prosperous, governed by a free trade pact, and each set their own currencies according to the speed of their economies. Known affectionately as the EEC. This nonsense of Europe splitting apart and becoming antagonistic is as wishful thinking as the Northeast and California splitting off and leaving the red states to themselves. Ain't going to happen.

[marignymitch]

03:48 PM on 04/27/2012

More austerity!

[totalliberal]

12:23 AM on 04/28/2012

Higher taxes. And punish the people who aren't paying them.

[Whyalwaysme]

03:15 PM on 04/27/2012

The holidays over then?

[holyghostie]

02:54 PM on 04/27/2012

time to head to Mexico.