Standard & Poor's late Thursday became the first of the three leading credit rating agencies to strip Spain of an A rating. In a statement, S&P wrote: "Spain's budget trajectory will likely deteriorate against a background of economic contraction." How can Spain's economy do anything but contract? Companies like the S&P want Spain to show more fiscal support for the banks, but how can it do that when it cannot even reach its own budget? There are going to be heightened risks for the government; we are by no means done, only beginning.
Spain's 10 year bonds, used as a measuring stick for the economic crisis, were at 5.93. Even though this is below the 7% level that is considered an unsustainable rate, and it continues to show that investors are getting jumpy. It had pushed over the 6% level numerous times already and investors are worried about reliving another Ireland, Portugal, or Greece incident again.
But this time it would be worse. Spain is the fourth largest economy in Europe; this is what makes it even more significant. It is a lose-lose situation for the country. Prime Minister Mariano Rajoy has to convince investors he can control the economy and help unemployment. Yet-- gross domestic product contracted 0.4 percent in the first quarter, tipping the nation into its second recession since 2009. With the banks threatening to disrupt the Premier's efforts and its budget shortfall projected to reach 6 percent this year and 5.7 percent in 2013, it is not likely to get better soon. Spain has to push through the deepest budget cuts in at least three decades while battling banks and investors.
This is not something that will be over soon and it will continue to have huge consequences for U.S. companies that have a market in Europe. Besides Spain, even Great Britain was recently declared to be in a second recession. It is highly possible that companies will find revenue receding. This is not something new, but U.S. companies are just starting to feel the pangs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.