One by one, the dominoes tumble. Following Greece and Portugal, Spain’s debt was downgraded another notch on Wednesday to AA by Standard & Poor’s. The timing is unfortunate. The agency, which first downgraded Spain’s debt in January last year, lowered its average economic growth forecast to 2016 to 0.7 per cent annually, from 1 per cent previously. But Spaniards might ask, with some justification, what took S&P so long. There has been little unexpected economic news from Madrid. Markets were also relatively unperturbed, with the yield premium of Spanish debt over German Bunds falling slightly after the downgrade.

Spain’s economy is not remotely in the dire shape of Greece’s, and neither are its public finances. Public debt, at 55 per cent of gross domestic product, half of Greece’s ratio, remains manageable and is expected to peak at 74 per cent in 2012. But Madrid’s optimistic forecast that gross domestic product growth will reach 3.1 per cent by 2013 still sounds much less realistic than S&P’s prediction of “an extended period of subdued economic growth”.

Real concerns remain. Many sectors of Spain’s economy are uncompetitive and its labour market is inflexible. Spaniards are now saving 18 per cent of disposable income, an inevitable response to the abrupt end of Spain’s property boom that has left a fifth of the workforce unemployed, shrinking tax receipts and swelling benefit payments. The government’s stimulus efforts have driven the budget deficit to 11.4 per cent of output. While Madrid plans to cut this to 3 per cent by 2012, it has yet to show the fiscal adjustment zeal of Ireland. And Spain still needs to raise a net €77bn this year.

Madrid’s policymakers, traditionally hypersensitive to criticism, should not then treat S&P’s downgrade as a national insult, but as a reminder that others do not yet have grounds to share their optimism.

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