I MENTIONED the other day that, after S&P downgraded Spain's debt last week, the Zapatero government and its cheerleaders quickly devised a new strategy: saying that the rating agencies are not credible, because they have failed many times, for example maintaining Lehman Brother's AAA rating until the day it came crumbling down (that they said that at the same time they were saying that S&P's downgrade was no big deal because the other two big ones, Fitch and Moody's, still rated Spain as AAA is an irony that eluded them, apparently). But they didn't realize that all the examples of the agencies' missing the point was when they were overly optimistic. I may be wrong -- I'm not an expert in this --, but I don't know of a time when the agencies said that a company or country was in bad shape and reality proved them wrong because that company or country was doing well. It's always been the other way: the agencies failed to grasp the problem's existence, or at least its seriousness. PIMCO's Bill Gross, who know a thing or two, agrees, and it's awful for Spain:

Pimco’s bond guru Bill Gross (pictured) has slammed rating agencies blasting their ‘timidity and lack of commonsense’.

His ire was raised after Standard & Poor’s downgraded Spain one notch from AA+ to AA last week with the threat of a further downgrade if the Spanish government did not act soon to stabilise its finances.

‘Oooh so tough and believe it or not Moody’s and Fitch still have them as AAAs,’ he says. ‘Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!’

So the markets, which at the end of the day it's what counts, are trading Spain's bonds much, much lower than the 'official' ratings. That's the grim truth.

UPDATE. Here's Gross' letter in full.