Rating bias
Spain – A country that grew by leaps and bound aided by the global credit glut and driven by the surging real estate sector to unreal(istic) levels (as has been the case with many countries), Spain experienced its Minsky moment as the world spiraled into a recession. During the 3rd quarter of 2009, when most of the European Union countries climbed out of recession, Spain’s economy shrank, for the sixth straight quarter. While the latest decline of 0.3% is not too bad as compared to some other economies, but the country is in real big trouble. An unemployment rate of 20% (possibly next only to Latvia) is unbearable. More so, if one considers the fact that at one point in time Spain was one of Europe’s top job creator. As per one estimate, Spain has lost about a million jobs in the real estate sector alone. These are mostly for unskilled workers, and it is highly likely that most of these jobs are lost forever. According to their National Statistics Institute (Nacional de Estadistica), Spanish home mortgage lending dropped 31 percent year-on-year in October, as banks continued to restrict credit.
Even its finance is in a mess. According to IMF (World Economic Outlook forecast as of October 2009), Spain’s budget deficit for the current year will be around 12.3%, because of dipping tax revenues and the mounting costs of combating the economic crisis. The government has funded public works projects aimed at reducing joblessness, along with unemployment benefits, car buying incentives and other measures that it hoped will help restart the economy. But things are clearly not working. For 2010, the deficit is expected to rise to 12.5%. Clearly, the deterioration in the public finances, which have swung from a budget surplus in 2007 to a deficit of over 10% of GDP, is forcing retrenchment. As a result, the government has planned to raise taxes. This, I think is going to adversely impact the potential recovery, as domestic demand will start to falter. Hence they would necessarily need to depend more on exports to bring the economy back on track. An analysis of Spanish export destinations show that virtually 75% of their exports are accounted for by the EU. A lot, will, therefore depend on how soon and how fast their trading partners recover. I feel that the recovery would not be strong enough to positively impact the economy to the extent desired.
Despite such huge economic imbalance, Spain’s sovereign rating is still AA+, with a negative outlook.
Ireland – The Celtic tiger is hobbling and how. The high growth rate (at times at 10%) that the economy experienced from 1995 till 2007 has transformed Ireland from being one of Europe’s poorer countries to one of the wealthiest. As the economy grew stronger on the back of fast rising exports, wealth increased manifold. And then, as has been the case with most of the countries, real estate boomed as if there was no tomorrow, and propelled the economy even higher. And then the crisis hit the economy big time and the energy of the tiger was sapped. The economy entered into a recession. Starting from Q1 2008, the economy shrank in 5 out of 6 quarters (QoQ). During the last quarter the trend has been reversed, but only just. In YoY terms, however, the economy shrank the 7th straight quarter. For the year as a whole, the Irish GDP is expected to shrink by 6.4%, while the GNP is likely to go down by as much as 10.4%. Their current unemployment rate is as high as 12.5%.
Even if Ireland emerges out of recession, the growth will be so slow that it might not look like any recovery at all. And, to put it mildly, government finances are in tatters. IMF’s forecast of Ireland’s budget deficit for the year is 12.1%, which will grow to 13.3%. However, the country has recently announced certain steps that can bring down the deficit by about a couple of percentage points. This includes a saving Euro 4 billion in this month's budget for 2010 by drastically reducing public spending, even going to the extent of reducing salaries of the employees in the public sector. Despite this, the deficit will be well above the cap of 3% that every EU member must necessarily adhere to.
A country that was given up as a no hoper enjoys very high rating for the high growth recorded only during the 12 year period. Despite the current financial vulnerability, Ireland still enjoys a long term rating of ‘AA’, though with a negative outlook. Not even China enjoys this luxury despite their high growth for more than two decades.
