Spain was downgraded by Fitch rating agency on Thursday, cutting the euro zone’s fourth largest economy’s credit rating by three notches to BBB, just two notches above junk status. The agency maintains a negative outlook for the creditworthiness of Spanish debt.
In its statement Fitch blamed the European leaders for “policy-misteps” and an “absence of a credible vision” for the euro which had resulted in a “dramatic erosion of Spain’s sovereign profile.”
These strong words will prove embarrassing for the European Union Commission.
Fitch issued warnings on the stability of Spain’s banks, debt levels and economy and said the cost of bailing out its banks is likely to cost around 60 billion euros but could rise to as much as 100 billion euros. This is more than three times higher than the 30 billion in its last “baseline estimate”.
One of Spain’s largest banks, Bankia, recently asked the government for 19 billion euros for assistance to stay afloat.
Spain’s high level of foreign indebtedness has made it especially vulnerable to contagion from the ongoing crisis in Greece.
Fitch added that the much reduced financing flexibility of the Spanish government is constraining its ability to intervene decisively in the restructuring of the banking sector and has increased the likelihood of external financial support.
The downgrade was also based on Spain’s contracting growth. The country’s debt-to-GDP ratio was upwardly revised to 95 percent of GDP in 2015.
The Spanish economy is contracting after a housing bubble wreaked havoc on its banking system.