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Spain Downgrade Is Proof Austerity Not Working

Friday, 4 May 2012 | 3:27 AM ET

Ratings agency Standard & Poor's downgrade of Spain's credit rating Thursday for the second time this year highlights the fact that austerity alone is not enough to tackle the euro zone debt problem. Experts tell CNBC that European leaders need to focus on growth now.

Spain
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Spain

"Clearly, austerity and growth cannot go hand in hand... I think we need to see European leaders break out of this pure austerity mode and try and do something different in terms of pro-growth policies," Vasu Menon, Vice President, Group Wealth Management, OCBC Bank, told CNBC Asia's "Cash Flow."

Spain's long-term debt was cut to Triple-B plus from A, while its short-term rating was lowered to A-2 from A-1. In January, S&P downgraded Spain along with eight other euro zone countries of their coveted triple-A status.

The latest downgrade was prompted by concerns over growing government debt amid a contracting economy. The Bank of Spain said earlier this week that the economy probably contracted 0.4 percent in the first quarter of 2012. Official figures are due April 30.

Spain's Challenges Have Increased Faster Than Reforms: S&P
Moritz Kraemer, managing director for European Sovereign Ratings at Standard & Poor's, told CNBC, "We have taken account Spain's reforms but it is our view that while the government has begun to tackle those issues more robustly than previously the challenges have increased even faster."

Austerity measures are beginning to impact European economies as they slip into recession, according to Menon.

"We can see that it's starting to impact the economies in Europe, not just in the euro zone but in the UK as well — they've implemented austerity measures and look at what happened to them, they're in a recession right now," Menon said.

According to Marc Seidner, Managing Director, PIMCO, "If economies can grow then countries can safely delever from heightened debt level, if not, crisis continues."

No Quick-Fix

Analysts agreed that there was no short-term solution in sight and that the European Central Bank would have to keep injecting cash into the banking system.

"In Europe, they're basically committed to providing money to throw at the problem forever. They might need to do it for years," Richard Jerram, Chief Economist, Bank of Singapore told CNBC Asia's "Squawk Box."

Menon adds, "If anybody expects any quick solution out of Europe, they're really hoping for too much."

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