Spain’s economy was thrown into chaos on Thursday when its credit rating was cut, sharpening fears that Britain may suffer a similar fate.
The turmoil came just a day after Greece’s rating was cut, increasing concerns of a Europe-wide financial crisis.
The euro fell sharply and the interest rates European governments pay to borrow money jumped after Standard and Poor’s, a credit ratings agency, downgraded Spain.
Last night the government in Madrid appealed for calm, promising an “austerity programme” to cut spending.
But economists fear that events in Spain show that financial “contagion” is spreading from Greece, as investors are scared off investing in any European country with significant government deficits.
Britain’s government deficit this year will be bigger than that of either Greece or Spain, and some City analysts believe the UK’s AAA credit rating could be cut, driving up interest rates and raising the prospect of Britain being bailed out by the International Monetary Fund.
Yesterday David Cameron, the Conservative leader, suggested Britain could follow Greece into crisis. “Greece stands as a warning to what happens if you don’t pay back your debt,” he said.
David Miliband, the Foreign Secretary, accused Mr Cameron of “economic illiteracy”. Lord Mandelson, the Business Secretary, insisted that Britain was in a “very, very, very different situation” from Greece, because the UK retained its AAA rating.
But Neil Mackinnon, an economist from VTB Capital, said it was “a mystery” that Britain had not yet been downgraded. (Look you controls the credit agencies and the mystery disappears.)
Angel Gurria, the head of the Organisation for Economic Co-operation and Development, said “contagion has already happened”, likening the crisis to the flesh-eating bug Ebola.
“When you realise you have it you have to cut your leg off in order to survive,” he said, telling indebted countries to start cutting spending.
By James Kirkup and Christopher Hope
Published: 7:06AM BST 29 Apr 2010
Source: The Telegraph