Europe Or Brewing More Storm

Fitch, the internationally renowned rating agency, announced on Friday that it lowered its sovereign rating to Spain. Fitch's latest action is no doubt telling investors that the debt crisis in the eurozone is far from the end.

Spain's sovereign rating dropped to AA+

On Friday, Fitch announced its downgrade of Spain's sovereign rating, from AAA to AA+, with a stable outlook.

According to Fitch, Spain's fiscal consolidation is expected to slow down its economic growth in the medium term. Spain will undergo a longer and more difficult economic adjustment process than other AAA countries. Spain's economic recovery is slower than its government's current forecast.

In the three major international rating agencies, S & P lowered Spain's sovereign rating from AA+ to AA at the end of April, while Moodie still gave Spain AAA rating.

Spain's finance ministry official said that although Spain was downgraded, Spain's overall rating was still high.

The officials stressed the need to understand Fitch's decision based on the background of structural adjustment in the Spanish economy.

Rating agencies cut the sovereign ratings of euro zone countries with a relatively high proportion of the deficit is no longer new. However, in the current market dominated by risk aversion, the news of downgrading immediately aroused investor vigilance, and the euro failed to extend the previous rebound trend, while non US currencies and US stocks fell on Friday.

Reduce the deficit and reduce the deficit

In the past, Greece has joined the eurozone and IMF at the cost of the massive deficit reduction measures. Under this demonstration effect, Portugal and Spain also introduced the austerity plan this month.

Despite many pressures, the Spanish parliament passed a tight budget plan for the next two years on a weak vote last Thursday. The Prime Minister of Spain also made a commitment last Friday to reduce 2011's spending by 7.7%.

Earlier in May, Spain announced that it would adopt new austerity measures, reducing the deficit by 5 billion euros and 10 billion euros in the next two years, reducing the fiscal deficit from GDP at the end of 2009 to 11.2% in 2011 to 6% in 2011.

The Spanish finance minister said that the biggest contribution of fiscal policy to the economy at present is to try to reduce the deficit.

In order to restore market confidence, the euro zone's deficit reduction is obviously imperative. However, such behavior has triggered concern about the economic growth of the euro area countries, and the weakening of economic growth capacity will weaken the country's solvency.

Although some analysts believe that the euro zone's austerity plan is positive, worries remain unresolved, and the market can not change its view of the euro's long term bearish.

The euro has fallen for 6 consecutive months against the US dollar, the longest decline since April 2000.

Last week, the euro closed near 1.2280 against the US dollar.

Brewing more storm

Analysts said that the Fitch's reduction in Spain's sovereign debt rating was actually "unexpected", but the timing of the announcement was still "unprepared" for the market, reflecting the investor's further confidence in the European market and the deepening crisis. Europe seems to be brewing a bigger market turmoil.

"This should be a reminder of the market," Brown Thin, Win strategist at Brown Brothers Harriman, said. "This week when the news from Europe is a little flat, the potential risk is that there will be more bad news from Europe and disrupt the market from time to time" in.

If Spain's downgrade is just a wake-up call for global investors when Europe is calm, investors should be more vigilant about Spain's significance and the bigger storm it is brewing.

Some analysts pointed out that in the European debt crisis, before Spain, other countries were downgraded, but this difference is that "Spain is of great significance: in terms of gross domestic product (GDP), Greece and Portugal belong to small countries, but Spain's GDP is about five times that of the two countries."

Economists have long pointed out that after the outbreak of the financial crisis, the southern European government "borrowing the wall to make up for the west wall" to stimulate the economy everywhere, has shown that the European recovery is mostly a mirage illusion.

Because the European countries have many short-term loans over the past two years, the average period is less than two years.

Therefore, what is more unexpected than downgrading is that Spain and other debt crisis countries will face increasing financial market refinancing risk.