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Europe stocks hold steady in spite of Spain

EUROPEAN equities held their own yesterday despite fears that a key downgrade of Spain’s sovereign debt before the weekend would weigh heavily on the markets.

The FTSE Eurofirst 300 index of top European shares closed up 0.3 per cent at 1,000.55 points, ending its worst-performing month since February last year, while the euro recouped losses sustained after the downgrade to trade around $1.23.

The Dax index in Germany added 0.31 per cent to 5,964.33, though Madrid’s benchmark IBEX and Paris’s CAC 40 both slipped on country-specific concerns.

Fitch Ratings on Friday evening issued a credit downgrade for Spain, lowering its rating from triple-A to AA+ just a day after the governing socialist party scraped a new €15bn (£12.7bn) austerity package through parliament by a single vote.

“The downgrade reflects Fitch’s assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term,” said Brian Coulton, Fitch’s head of EMEA sovereign ratings.

The move was the second such hammer blow for the country in as many months, after it endured another downgrade at the hands of fellow ratings agency Standard & Poor’s in April, taking it from AA+ to AA.

Trepidation over the risks of contagion in the eurozone were compounded over the weekend, as France’s budget minister Francois Baroin admitted that retaining the country’s triple-A rating would be a “stretch”.

France is currently engrossed in plans to tackle its own gaping fiscal deficit, which is expected to come in at around eight per cent of gross domestic product this year. The country wants to bring the deficit below the EU’s three per cent limit within three years, and has already frozen central government spending between 2011 and 2013, barring pensions and interest payments.

Meanwhile, German chancellor Angela Merkel was hit by further problems yesterday after the country’s president Horst Koehler resigned his largely ceremonial position. Koehler, a former head of the IMF, had drawn heavy criticism for comments he made linking German military deployments abroad with the country’s economic interests.

TIME LINE | EUROPE’S SOVEREIGN DEBT CRISIS

• December 2009
Greek debt is downgraded by Fitch Ratings, Standard & Poor’s and Moody’s, on concerns over its debt black hole.

• 25 March, 2010
European Central Bank president Jean-Claude Trichet softens rules on collateral for ECB loans, easing risk of Greek institutions being cut off from funding.

• 27 April, 2010
S&P downgrades Greece's credit rating to junk status and cuts its rating on Portuguese debt by two notches to A–.

Just a day later, S&P downgrades Spain’s rating by one notch to AA, warning that the country is likely to suffer an “extended” period of subdued economic growth.

• 2 May, 2010
Greek prime minister George Papandreou agrees a bailout deal with the EU and IMF, promising stringent austerity measures in return for a €110bn rescue package.

• 10 May, 2010
EU and IMF install emergency European safety net worth €750bn, to bolster financial markets and prevent the Greek crisis destroying the euro.

• 18 May, 2010
Germany unveils naked short selling ban.

• 28 May, 2010
Fitch Ratings follows S&P in downgrading Spain’s sovereign rating from AAA down to AA+.