Standard & Poor: Spain's debt burden 'could undermine plan to rein in debt'

(Received by e-mail) Credit ratings agency Standard & Poor's warned Spain Friday that its weak economic growth prospects could undermine its plan to rein in its budget deficit, making a debt downgrade even more likely. Though short of the levels being posted in Greece, investors are increasingly worried about Spain's budget deficit - and skeptical about the government's ability to push through sharp cutbacks to right the situation. The government has announced both tax rises and spending cuts - not all yet specified - to reduce its deficit back towards the 3 percent limit that euro rules prescribe.>

In a statement, S&P said Spain's deficit would likely remain above 5 percent of the country's gross domestic product through to 2013 against the government forecast of 3 percent, and that as a result the debt burden could rise to above 80 percent of GDP by 2012.

S&P said it also expects much weaker economic growth than the Spanish government and that there was a "significant implementation risk" with regard to the current plan to reduce the deficit, which is estimated at 11.4 percent of GDP in 2009.

Spain, which has still to get out of recession, is expected to grow by an average annual rate of 0.6 percent between 2010-13, according to S&P, way down on the Spanish government's forecast of 1.5 percent.

S&P said it saw downside risks relating to the government's revenue collection assumptions in particular, largely because Spain's tax base is "highly sensitive" to domestic demand and has been sensitive to the real estate sector, which has collapsed over the last couple of years.

"Neither of these sources is likely to be a strong contributor to revenue growth over the next several years," S&P said.

S&P said it was maintaining its negative outlook on Spain's double A+ rating, which it assigned in December, in the absence of "more aggressive and tangible actions" by the authorities to tackle Spain's economic and fiscal problems.

"Any deterioration over and above our current expectations could put further downward pressure on the ratings," S&P said.