Spain is Downgraded

April 27, 2012

Its still not over…

Today, the S&P downgraded Spain’s sovereign debt credit rating two-points to a BBB+ level. The announcement brings confidence in Spain’s credit rating to only three levels above “junk status”—the lowest level. S&P cited Spain’s inability to reach budget-cutting targets and the possible need for future bailouts, as the reason behind the downgrade. Spain’s economy remains stagnant with unemployment at 23 percent. Upon the announcement, the cost of Spain’s borrowing rate jumped to 6 percent.  There is an issue here for the United States.  Once investors view your bonds as a risky investment, they will demand more in interest—and the higher the interest, the more costly it is to finance deficit spending.

In the midst of Spain’s crisis, Italy’s borrowing costs have skyrocketed, too. According to the Wall Street Journal:

The Italian government’s borrowing costs rose as it sold near the maximum targeted amount of government bonds at an auction Friday, reflecting investors’ continued concerns about its ability to meet tough budget targets while theeconomy remains in recession. The auction came a day after Standard & Poor’s downgraded Spain’s sovereign debt rating by two notches. Italy shares many of the same fiscal problems.

The US should pay attention to what’s happening abroad.  The debt crisis is still alive in Europe, and could be on its way to the US.

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