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More pain for Spain: Nation loses AAA rating

/ Source: The Associated Press

Fitch Ratings cut Spain's credit rating Friday, saying its government's efforts to reduce debt would weigh down economic growth.

The ratings agency dealt a blow to state efforts to shore up confidence in its finances by cutting the country's rating one notch from AAA to AA plus. It said Prime Minister Jose Luis Rodriguez Zapatero's efforts to close the budget deficit "will materially reduce the rate of growth of the Spanish economy over the medium term." Lower growth would also mean gathering less in tax revenues, it said.

The decision echoed economists' concerns that efforts to cut state debt would hinder growth.

Earlier Friday, the government defiantly ruled out calling early elections and instead promised more austerity, forecast lower economic growth and higher unemployment and acknowledged having almost no parliamentary support for spending cuts designed to combat Spain's share of the European debt crisis.

"The people gave us their trust to govern for four years. That time is not up," Deputy Prime Minister Maria Teresa Fernandez de la Vega told a news conference after a Cabinet meeting.

On Thursday, a government austerity package freezing pensions and cutting civil servants' wages passed by just one vote in Parliament and opposition leaders called for a new election.

The austerity measures — which aim to cut spending by euro15 billion ($18.4 billion) this year and next and reduce Spain's oversized deficit — have been welcomed by the European Union and the International Monetary Fund but much criticized at home as a major reversal by the Socialists. The cuts are designed to reassure markets that Spain's government debt problems won't mushroom into a Greek-style crisis.

Europe's top job-creator only two years ago, Spain now has the region's highest unemployment rate, at just over 20 percent, and is the slowest of the major economies to emerge from the global recession.

The official forecast for the jobless rate had been that it would finish the year at 19 percent, but Finance Minister Elena Salgado revised that to 19.4 percent. She raised the projections for 2011 and 2012, as well, and said that in 2013 Spain will still have a jobless rate of 16.2 percent, 0.7 points higher than the previous forecast.

She also gave a grim report on prospects for growth. When it approved the austerity measures last week, the government announced it would shave 0.5 percentage points off the forecast for GDP growth for 2011, taking it down to 1.3 percent. Now, in 2012 output is predicted to be 0.4 percentage points lower than originally expected, and come in at 2.5 percent, and another four percentage points lower than planned in 2013, at 2.7.

Salgado also said the Cabinet had approved a total spending limit for 2011 that is 7.7 percent lower than the figure for this year.

Fernandez de la Vega said the government would pull Spain out of its crisis "with the support of many citizens" — she acknowledged most parties had voted against the austerity package.

Rafael Simancas, one lawmaker in Zapatero's party, wrote that had the austerity package not passed, Spain's credibility would have taken a beating in the markets, dragging down stock prices and sparking a huge rise in the government's borrowing costs.

Even the El Pais newspaper, which generally supports Zapatero, said "Spain came within one vote of situation that would have taken it closer to that of Greece."

Zapatero's party was the only one in Parliament to vote in favor of the austerity package. It passed only because three smaller parties abstained to spare Spain humiliation, not because they backed the measures.

Countries across the European Union — including Italy, Ireland, Portugal, Greece and non-euro member Britain — have also announced spending cuts and tax increases to maintain public confidence in their ability to manage their finances. But the measures have drawn protests and criticism from union leaders, particularly in Greece.

Some economists fear the cutbacks to appease the bond market may help kill Europe's hesitant economic recovery by withdrawing government stimulus efforts too soon.