Greece is spiraling into a sort of financial black hole, and dragging other countries with it. In an interview on 28 April, OECD Secretary General Angel Gurria was clearly pessimistic: “It’s not a question of the danger of contagion; contagion has already happened,” he said. And the reduction of the Spanish rating announced by Standard & Poor’s will certainly add to the uncertainty. The downgrading of the sovereign debt of a country like Spain will notably result in a permanent increase in the cost of capital borrowing, which will force up the cost of servicing debt in the public and private sectors.

Fiscal austerity plan no longer sufficient

“In a highly indebted country like Spain, this is very bad news,” explains Carmen Reinhart, an economist at the University of Maryland and the co-author of one of the best books on the crisis, This Time is Different, which she wrote with Kenneth Rogoff. The paradox is that Spain's problem has less to do with public debt than it does with private debt. The fiscal situation is dangerous because the deficit is high and the crisis may be prolonged, but the critical factor is that uncertainty on the markets has been amplified by the enormous level of private debt acquired by Spanish banks, businesses and families during the boom years. And the ratings downgrade will make this even more expensive to finance.

“Right now I believe that Portugal will have huge difficulty in escaping from a downward spiral prompted by what is probably a speculative attack,” explains Charles Wyplosz of Geneva's Graduate Institute of International and Development Studies. "Spain still has a few weeks in which to act. A fiscal austerity plan is no longer sufficient… It will have to push through urgent and far-reaching agreements very quickly, or even follow Germany's example and draft a law to outlaw public deficits. The response will have to be radical.” Analysts believe that the other two major ratings agencies, Moody’s and Fitch, will follow the lead set by Standard & Poor’s if the government does not take steps quickly.

Emergency measures must be implemented

Another consequence of the latest developments is that contagion is now spreading in more than one direction. Until now, Greece exerted a destabilising influence on other European countries; now Spain and Portugal's problems will certainly have an impact on Greece, as well as on the rest of the eurozone, and beyond. “This problem is not confined to Spain or even the periphery of Europe: the crisis could affect all of the developed world, which is involved in this budgetary shortfall,” explains economist José Luis Alzola.

At the end of the day, the agencies base their ratings on the same criteria as other investors, whether they be speculators or not: Spain's weaknesses are unemployment, and vulnerabilities in public finance and banking. “Emergency measures will have to be implemented in all of these three fields if Spain is to avoid going beyond the point of no return like Greece,” insists Intermoney's Chief Economist José Carlos Díez.