Global Economic Prospects 2015

The global economy is still struggling to gain momentum. Read more ...

Development Prospects

Providing information, analysis, and advice on global trends in the world economy.  Find out more ...

Global Economic Monitor

Now free. Daily and monthly updates on global economic developments and relevant topical issues. Find out more ...

Syndicate content

Prospects daily: Spain's credit rating marked down

Global Macroeconomics Team's picture

Important developments today:

1. S&P downgrades Spain's credit rating as contagion fears spread

2. Even with debt concerns, Euro-Zone confidence hits 2-year high

3. Russia slashes key interest rate for the 13th time this year in efforts to revive bank lending



S&P downgrades Spain’s credit rating as contagion fears intensify. Spain had its credit rating lowed one notch by Standard & Poor’s to ‘AA’ on Wednesday, putting it on a par with Slovenia, as fears continue to grow that contagion from the Greek debt crisis can spread through other euro-zone economies. The downgrade came a day after Portugal’s rating was slashed and Greece’s debt was given “junk” status by S&P.

The rating agency said in a statement that Spain is facing a sharp rise in borrowing costs and a more protracted period of recession than it had previously expected. In turn this will make it more difficult for the country to lower its budget deficit, which reached 11.2% of GDP in 2009, more than three times the EU limit. S&P also said Spain’s credit outlook is negative, implying that future downgrades could be in the pipeline if the “budgetary position underperforms to a greater extent than we currently anticipate.” Spain was last cut by S&P in January 2009, which resulted in the country’s loss of its triple-A status.

Euro edges higher on Greek aid pledge. The euro recouped moderately vis-à-vis the dollar on Thursday, up from yesterday’s one-year low, on hopes that the European Union and the International Monetary Fund will soon reach agreement on a financial aid package for Greece. The currency was knocked to a new low Wednesday a day after downgrades for Greece and Portugal. But the low for the euro was hit only briefly, with contagion fears easing somewhat amid reports that officials were weighing the a revised aid package for Greece that could be worth €100 billion to €120 billion over three years, contrasted with initial plans for about €45 billion during 2010 alone.

A successful sale of Italian bonds also helped alleviate heightened concerns that some euro-zone countries may struggle to repay their debt, narrowing yield spreads between Italian and German government bonds. The cost of insuring the sovereign debt for Greece, Spain, and Portugal against default also declined sharply Thursday. Credit-default swaps on Greek bonds narrowed by 35 basis points (bps) to 683bps, (the CDS had topped 900bps at one point on Wednesday), Portugal tightened 32bps to 295bps, and Spain was steady at 185bps.

In related developments…Germany and the IMF yesterday pledged to speed-up efforts to overcome Greece’s fiscal crisis. German Chancellor Merkel said that the “stability of the euro-zone was at stake if a loan package can’t be delivered quickly”—a distinct change in tone regarding the Chancellor’s views regarding prerequisites for the aid. And EU Economic and Monetary Affairs Commissioner, Mr. Olli Rehn said today at an unplanned press conference in Brussels that discussion of financial aid for Greece should conclude in the “next days.” Once agreement is reached on the aid mechanism, “…the support will give Greece sufficient breathing space from financial market pressures…this exercise is not done only for Greece, but for every Euro-Area member state and their citizens to safeguard financial stability in Europe and globally.”

Even with spiraling debt concerns, European confidence hits 2-year high. Abstracting from the ongoing speculation about potential sovereign default (Greece) and the spread of market risk aversion to additional Southern Euro-Zone economies (Portugal, Spain), confidence in the tenor of the real economy picked-up in new European Commission survey findings for April. The combined index of business and consumer sentiment for the Zone increased to a reading of 100.6 in April from 97.9 in March. Manufacturing was particularly strong, moving up to a dispersion reading of minus 7 from minus 10 in March, as export order books are firming. Still there is little sign of spillover to household spending and investment—potentially forthcoming in the second half of 2010—assuming resolution to the current Greek dilemma is found.

German unemployment falls in April. A promising sign of incipient recovery is the exceptionally sharp falloff in German unemployment during April, despite severe weather conditions and brewing concerns regarding Greece finance The number of unemployed persons dropped by 68,000 in the month, carrying the unemployment rate down from 8% to 7.8%--the fastest pace of decline in joblessness in more-than 2 years. German manufacturing remains the key driver for growth--accelerating in April (according to PMI surveys), with exports having surged 9.5% in February (m/m), export orders increasing at a 10% pace (saar), and actual factory production gaining 7% in the three months to February (saar).


Source: Department of Labor

U.S. initial claims fall in latest week. New claims for unemployment insurance fell by 11,000 to a seasonally adjusted 448,000 in the week ending April 23, in line with median market expectations. The four-week moving average of claims, which provides a slightly less volatile picture of the trend in layoffs, increased marginally by 1,500 to 462,500, still under the influence of an upswing in layoffs during the early weeks of April, caused by seasonal effects from the floating Easter holiday. The number of unemployed people continuing to receive benefits decreased by 17,000 to 4.65 million, while the number of people collecting extended benefits under federal programs decreased by 91,000 to 5.4 million. Though labor markets have come to a point of general stabilization since the early months of 2009, where an average 650,000 people were laid off each week, sub-par employment job growth means that it will be some time before a sustained recovery in jobs becomes entrenched.


Among emerging markets:

In South Asia, India’s food inflation eased to 16.61% in the week ended April 17th from 17.65% the previous week, and agriculture prices are expected to cool further on improved prospects for rain.

In Central and Eastern Europe and the CIS, Russia cut its key policy interest rate for the 13th time in a year, bringing the refinancing rate down 25 basis points to 8%, effective April 30th in a bid to boost bank lending. It also cut the repurchase rate charged on seven-day central bank loans by 25 basis points bringing it to 7%. The Czech government revised up its economic growth forecast for 2010 to 1.5% from 1.3% previously, on an improved export outlook. Czech authorities expect the economy to expand by 2.4% in 2011.

In Sub-Saharan Africa, South Africa’s producer price inflation accelerated to 3.7% year-on-year in March, from 3.5% the previous month, on higher costs of commodities, including oil. Zambia’s consumer price inflation eased to 9.2% year-on-year in April from 10.2% in March, on slower increases in food prices, the Central Statistics Office said (food inflation eased to 7.3% from 9%). And Kenya’s first-quarter tea output surged to 111.7 million kilograms (246.3 million pounds), up 69% (y/y) to the highest output levels in five years. Exports surged 24% to 93.8 million kilograms during the period.

Add new comment