Zapatero losing credit as Fitch downgrades Spain

Spanish Prime Minister Jose Luis Rodriguez Zapatero, isolated in parliament and his popularity slumping amid the biggest budget cuts in 30 years, is finding his efforts aren’t paying off internationally either.

Fitch Ratings late last week stripped Spain of its top AAA credit grade and questioned the nation’s ability to grow its economy as the government reduces spending. US stocks and the euro declined after the downgrade to AA+, on concern the European debt crisis will deepen.

“It’s bad news for the government,” said Fernando Fernandez, a former International Monetary Fund economist at IE business school in Madrid. “It shows a lack of confidence in the government internationally. It looks like the budget cuts haven’t helped.”

Zapatero, a Socialist running a minority government, faces strike threats from his traditional allies in the unions and risks being unable to pass next year’s budget because of opposition to his plans. His attempt to rein in the euro area’s third-largest budget deficit has also failed to reverse a surge in Spain’s risk premium amid concern that the European Union’s $920 billion bailout plan won’t solve the problems of its indebted nations.

In return for the European financial backstop, and urged on by US President Barack Obama, Zapatero announced on May 12 the first cut to public wages in Spain’s 30-year democracy and a freeze on pensions.

The measures are aimed at reducing the budget gap from 11.2 per cent of gross domestic product last year to 6 per cent in 2011. While they were initially welcomed by markets, pushing up bond prices and Spanish stocks, concerns have resurfaced.

Spain’s Ibex-35 share index fell 0.6 per cent at 9:40 am in Madrid to 9,360 points. The Ibex has declined 22 per cent this year amid concerns over the economic outlook. Even as bad loans are stabilising after a two-year surge, shares in Banco Bilbao Vizcaya Argentaria SA have fallen by almost a third.