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  • boomer_here_still boomer_here_still May 30, 2010 5:41 PM Flag

    European markets to fall tomorrow

     

    Euro under new pressure after Spain's debt rating is downgraded

    • Markets set to fall after ratings agency Fitch strips Spain of AAA score
    • French debt rating also threatened, says budget minister François Baroin

    The euro is expected to come under further pressure tomorrow as Spain's minority government teeters on the brink of collapse and traders fear contagion throughout the eurozone after a senior French minister admitted that his country's top-notch credit rating was under threat.

    Stock and debt markets are likely to take a battering after the decision on Friday by the ratings agency Fitch to strip Spain of its coveted AAA credit score, the second downgrade in a month.

    Fitch's decision was announced after the markets in Europe closed, so traders will have their first chance tomorrow to react, although London and New York will be sidelined by bank holidays.

    Weekend polls in Spain showed that support for austerity measures introduced by the government of José Luis Rodríguez Zapatero is vanishing fast, with many voters believing that he will be forced to call an early election. Zapatero's administration, which squeezed a new cuts package through parliament by only a single vote last week, also faces a potential general strike. A deadline to agree a deal over labour reforms is looming this week.

    Pressure on the country's banking system is also increasing. Spain's second-biggest savings bank, Caja Madrid, and five smaller lenders were last night racing to complete talks aimed at creating a €228bn (£193bn) banking group before a midnight deadline set by the government, which wants to see the country's 45 regional savings banks reduced to just over a dozen.

    Investors and economists fear that Spain may succumb to a Greek-style debt crisis, putting the very future of the euro in jeopardy as speculators push economy after economy over the edge in a domino effect. Italy, Portugal and Ireland are all seen as likely next targets, and even the largest European economies are coming under increasing pressure.

    In a television interview with Canal+ today, France's budget minister, François Baroin, admitted that "the objective of keeping the AAA rating is a stretch, and it is an objective that, in fact, partly informs the economic policies we want to have".

    The French government is trying to reform state pension benefits, having already announced that central government spending – apart from pensions and interest payments – will be frozen between 2011 and 2013.

    "We must maintain our AAA rating and reduce our debt to avoid being too dependent on the markets, and we must do this for the long term," Baroin said.

    In the UK, the weekend's resignation of the Treasury chief secretary, David Laws, is likely to be pored over by ratings agencies this week. Laws was a prime mover behind plans to curb public spending in order to get the public deficit under control, and his departure will be seen as a blow to the coalition government. Ratings agencies have already made it plain that they will be keenly watching the UK's 22 June budget.

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