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S&P removes Dutch from triple-A club, lifts outlook for Spain

Standard & Poor's agency cut the Netherlands' credit rating on Friday, reducing the euro zone club of full triple-A nations to just three, while rewarding Spain for efforts to reform its public finances.

S&P lowered the Netherlands, which is suffering from an anemic economy, slumping house prices and falling consumer confidence, to "AA+" from "AAA". This left Germany, Luxembourg and Finland as the only members of the 17-nation euro zone with the top rating from all three leading credit agencies.

However, it raised the outlook for Spanish debt to stable from negative and upgraded bailed-out Cyprus, highlighting diverging fortunes within the common currency bloc.

The fiscally conservative Dutch government has long been an ally of Germany in taking a tough line on the euro zone's "budget sinners" which run large deficits.

Now, S&P has stripped the Netherlands of its coveted top long-term rating to reflect its bleak economic growth prospects, while Spain appears to be finally emerging from the depths of economic despair, albeit slowly.

Dutch finance minister Jeroen Dijsselbloem, who heads the Eurogroup of his euro zone peers, said he was disappointed by S&P's decision. However, he told reporters there would be few consequences for the cost of financing the country's debt as interest rates on Dutch state bonds remain very low.

Yields on the 10-year Dutch government bond were 2.02 percent after the announcement.

Dijsselbloem said the only way for the Netherlands to win back its top rating was to tackle structural weaknesses in the economy with reforms of healthcare and pensions, as well as the labor and housing markets.

The country was pulling out of recession, he said. "Even though we are moving out of the crisis - we will have growth next year - it's still too low. We have to get higher figures in order to become a triple A country again, which is of course our ambition," he said, adding that the government would not try to stimulate growth by easing off on the budget.

"There is still broad support for quite tight budget discipline, so there is absolutely no reason to loosen the reins where budget discipline is concerned," he said.

Low Growth

S&P said the Dutch decision was due to a worsening of growth prospects. "The real GDP per capita trend growth rate is persistently lower than that of peers at similarly high levels of economic development," S&P said in a statement, while affirming the Netherlands' short-term debt rating at A-1+.

A crisis in Italy and Spain has eased over the past six months but Europe is still struggling to achieve the economic growth it needs to bring down unemployment and deal with debt burdens that in some countries are above 100 percent of annual national output.

The Dutch, who have consistently stressed the need for budget austerity in the bloc's struggling southern half, have been forced into several rounds of their own cuts to meet the European Union's target of a deficit of 3 percent of GDP.

Despite billions of euros of budget cuts, the Netherlands is still expected to exceed the target this year.

Last month the Dutch central bank warned that weak bank lending was holding back economic recovery. Consumer demand remained fragile, exacerbated by a property market crisis in which house prices have fallen a fifth since their 2008 peak, and by deep government spending cuts, it said.

As in other euro zone countries, the austerity measures have provoked much political wrangling and public anger. The Dutch economy, emerging from its third recession since the global crisis began in 2008, grew 0.1 percent in the third quarter.

This was in line with the average for the euro zone, where a French recovery fizzled out and German growth slowed.

S&P forecast the Dutch economy would contract 1.2 percent in 2013, before growing 0.5 percent next year and gradually accelerating to 1.5 percent by 2016.

Rival agencies Moody's and Fitch still rate the Netherlands as triple-A. Dijsselbloem said he was optimistic they would not follow S&P in lowering the Netherlands' credit rating.

"They quite recently reconfirmed our triple A status and I don't expect them to consider any downgrade. There is no sign of that, so I'm quite confident there," he said.


Spain, whose ratings have plummeted over the last two years as it struggled to rescue banks and cash-strapped regional governments, recently revised up its 2014 growth forecast to 0.7 percent from 0.5 percent.

Prime Minister Mariano Rajoy welcomed the improved ratings outlook. "It is an impulse for the government to keep working ... It is a success for Spanish society, which has been through a lot of hardship over the last years," he told a news conference in Vilnius, on the sidelines of a summit.

S&P is the second of the three main credit ratings agencies to lift its Spanish outlook in less than a month after Fitch also switched to stable from negative in early November.

The agency affirmed Spain's BBB-/A-3 long and short-term foreign and local currency sovereign credit ratings, saying Spain's external position was improving as economic growth gradually resumes.

"Other credit metrics are stabilizing, in our view, due to budgetary and structural reforms, coupled with supportive euro zone policies," the agency said.

Thanks to wage moderation and harsh economic reforms, Spain has regained part of the competitive edge lost during a decade-long property boom. Its exports are rising and its net lending position against the rest of the world is expected to turn positive for the first time in decades.

Moody's, like S&P, rates Spain one notch above junk while Fitch rates the country one notch higher.

S&P raised its rating for Cyprus to B- from CCC+ on Friday, saying immediate risks to the island's debt repayments appeared to have receded.

This marked the first upgrade in three years for Cyprus, which was shut out of international financial markets in 2011 and came to the brink of financial collapse earlier this year.

The island, one of the smallest countries in the euro zone, signed up to a 10 billion euro bailout program with the International Monetary Fund and European Union in March.

[Source: By Thomas Escritt and Julien Toyer, Reuters, The Hague and Madrid, 29Nov13]

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