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Standard & Poor’s Downgrades Spanish Debt

Posted by Steve Markowitz on April 26, 2012

The Wall Street Journal reported after the markets closed that Standard & Poor’s (S&P) downgraded Spain’s bonds two notches from A to BBB+.  This will likely lead to increased borrowing cost for Spain, a country that cannot afford to pay back its loans even before any increase in interest costs.

Before the 2008economic downturn hit, Spain had the highest debt rating of AAA.  Its continually sliding bond ratings is a similar theme that has hit many Western countries, including one downgrade the United States’ debt.

Spain and other highly indebted countries will not be able to repay a significant portion of their sovereign debt.  European governments are attempting to forestall this reality by printing money and bailouts.  However, as they kick the can down the road, each sovereign debt crisis is increasing in significance.  While Greece was a canary in the mine for sovereign debt problems, there are bigger one still to come.

Under more typical economic times, equity and bond markets worldwide would be reacting quite negatively to the sovereign debt problems.  However, the moral hazard has been broken with the myriad of government interventions worldwide in recent years.  As a result, equity markets are back to pre-meltdown levels and are likely becoming a new bubble that when popped, will cause other unintended consequences.

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