27th April 2012

Fidelity's Tristan Cooper on S&P downgrade of Spain

Commenting on today’s downgrade, Tristan Cooper, Sovereign Debt Analyst at Fidelity Worldwide Investment, says: "We have had significant concerns about Spain for some time and so agree with the overall thesis behind S&P's downgrade. For us though, it not so much the level of government debt that is the primary concern. This remains some way below the Eurozone average and the level seen in higher rated peers. It is rather the pernicious cocktail of very high unemployment and a very wide fiscal deficit in the context of a deep recession. This gives the government little room for manoeuvre in terms of fiscal consolidation and will leave it vulnerable to liquidity risk for a prolonged period.

“S&P's revised assumptions for growth still appear optimistic. Of course, contingent liabilities stemming from the banking sector are also a major focus. Spain has so far taken the opposite approach to Ireland on this. Ireland took the costs up front onto the sovereign balance sheet as part of a massive intervention to replenish capital. Spain has chosen a softer approach, asking the banks to clear up their own mess before the government pumps in cash. We may have reached the end of the road on that one though as the absorptive capacity of the banks reaches its limit. A decision point on bank support is approaching fast and this could involve asking the EU for help."

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