This global unwinding process is a direct result of all the underlying bad debt and bad math. Much of Europe is indeed worse off than the United States and we may very well see our dollar appreciate against much of the rest of the world’s currencies until the unwind has run its course. This will not be a good thing for our equity markets which are still down tonight in the futures markets.
S&P strips Spain of its AAA credit rating
Standard & Poor's has stripped Spain of its coveted AAA status in the first such move against a top-rated country since the global crisis began, reflecting the deep damage suffered by Spanish public finances as the debt bubble bursts.
By Ambrose Evans-Pritchard
Last Updated: 9:47PM GMT 19 Jan 2009
The credit-rating agency's downgrade comes at a delicate moment for Euroland's weaker bloc. Several states already face difficulties raising money on the bond markets. The yield spreads on Spanish debt rose yesterday to a post-EMU high of 122 basis points above German Bunds, though still below levels for Italy, Ireland and Greece.
Explaining the downgrade, S&P cited the "structural weaknesses in the Spanish economy" and predicted a long recession that will raise public debt by 18pc of GDP and may entail a huge bank bail-out.
Brussels predicted that unemployment in Spain would reach 19pc by next year, pushing the jobless total to near 4.5m. Opposition leader Mariano Rajoy called on finance minister Pedro Solbes to step down as a "patriotic duty". "This is a man who has thrown in the towel. He's given up, he's got no ideas left and no clue what to do next," he said.
Myriam Fernández, S&P's lead analyst, said Spain's euro membership provided stability but also tied Madrid's hands as it tries to respond to the crisis. "It doesn't have control over monetary policy and lacks the flexibility to correct its current account by devaluation," she said.
Alberto Mattelan, an economist at Inverseguros, said the key risk over the next two years is Spanish companies' debt load. "They are very dependent on external credit. At 10pc of GDP, it's the highest in Europe. There won't be a real recovery until 2011," he said.
Spanish politics may not wait that long. Some 35,000 trade unionists marched through Zaragoza, in the county's north-east, on Sunday to demand "job protection" after a clutch of factory closures in Aragon's industrial hub. It was the first big labour protest against the Socialist government of Jose Luis Zapatero. "We're paying the bill for this crisis and we are not going to pay the bill any longer," said union leader Julian Buey.