Spain’s Economy Worsens: Debt Downgrades and Nationwide Protests

According to recent reports, Spain’s economy has contracted for the second consecutive quarter. The banking sector has suffered from the S&P downgrade and government debt pressures. In the ensuing week, Spain is expected to have nationwide anti-austerity protests as citizens express their disapproval of the government’s austerity measures. Starting on Labor Day, these protests are expected to span a full week.

According to the INE on Monday, the country’s GDP decreased by 0.3 percent from the first to fourth quarter. Annually, it contracted 0.4%. The two quarters of economic downturn are technically termed a recession by economists. The data confirms international fears that Spain is a long way from an economic rebound. Controversial government austerity programs have only served to hamper economic growth.

Debt Downgrade by Standard& Poor

Last week, Standard& Poor downgraded Spain’s rating by a full two notches. They stated that it would be very unlikely that the Spanish government would be able to meet its deficit reduction goals. Across the nation, 16 banks have received negative ratings. This blow serves to further cripple a country that has experienced a four-year real estate bust.

Sixteen Banks are Downgraded

Banco Santander, Europe’s second largest bank, was reduced to an A-minus rating while Banco Sabadell was lowered to junk states. The second largest Bank in Spain, Banco Bilbao Vizcaya Argentaria was reduced to a BBB+ rating. For these three banks, the S&P listed the outlook at negative.
Labor Day Strikes Across the Nation

On May 1, Spain will be celebrating its Labor Day. Starting on that day, labor demonstrations across the country are preparing for protests and marches. Unrest in Spain is being driven by the austerity measures imposed by the European Union and Spain’s government. Starting next year, the government is supposed to contain its deficit to just 3 percent of the gross domestic product. Although the government has committed itself to these targets, the number of protests and civil unrest may test their commitment to this pledge.
Thankfully, the drop in the country’s gross domestic product was not as much as investors feared it would be. As GDP drops, the cost of insuring Spain against a debt default decreases. Currently, five-year credit default swaps are trading at 4.7 percent. This rate is 0.03 percent higher than the previous rate. These credit default swaps operate as a kind of derivate. They are a kind of default insurance contract. If Spain defaults, the buyers will be compensated for their loss.