As you have probably heard, S&P downgraded Spain's credit last night to AA. So? you ask. AA is still a pretty good credit, better than that of most American largest banks, for instance. S&P cited high unemployment (20%+) and weak growth prospects.
Our sacrosanct markets, however, are pretty sanguine about the whole thing because Spain is allegedly making progress towards cutting their deficit from almost 10% in 2010 to 3% by 2013 (and zero by 2020). Even the WSJ, which carries a piece today (you need a subscription to read it) about how unlikely it is that Spain will meet its 6% deficit target for 2011, is hardly sounding any kind of alarm because they take the government numbers at face value.
The facts on the ground, however, are quite different. Those who bother reading the Spanish papers on a regular basis, know that the Spanish government has simply resorted to that time honored austerity strategy of ignoring the bills that come due. According to an article in Expansion the Spanish public sector has accumulated 20 billion euros of unpaid bills in 2011 (about 2% of GDP). In other words, not only are they are nowhere near meeting the deficit target for this year, they have made little progress compared to last year.
The sad thing is that none of the mainstream English-language publications (FT, WSJ, The Economist, etc) seem to bother to check the local press (perhaps they cannot find qualified Spanish speakers?) which perpetuates the myth of Spain's cost cutting progress. No wonder when they storm comes our policy makers claim that "nobody could have known."
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