Rating agency Standard & Poor’s has downgraded Spain’s credit rating by two notches, warning that the deepening economic recession is limiting the government’s options.
S&P warned that rising unemployment and harsh austerity measures are likely to intensify social unrest and cause further friction between Spain’s central and regional governments.
“The downgrade reflects our view of mounting risks to Spain’s public finances, due to rising economic and political pressures,” said the rating agency in a statement.
“In our view, the capacity of Spain’s political institutions (both domestic and multilateral) to deal with the severe challenges posed by the current economic and financial crisis is declining, and therefore, in accordance with our rating methodology (see “Sovereign Government Rating Methodology And Assumptions,” published June 30, 2011), we have lowered the rating by two notches.”
The downgrade to BBB- from BBB+ late on Wednesday leaves Spain one notch above “junk” status. S&P also attached a “negative outlook”, which warns of a possible downgrade in the medium term.
S&P said it would downgrade the country’s debt status further if political support for Madrid’s reform agenda weakens, if eurozone support fails to prevent Spain’s borrowing costs hit unsustainable levels or if debt tops 100pc of economic output or debt payments surpass 10pc of general government revenues.
The rating agency also expressed doubts that all of the eurozone countries would give their backing to 17-nation bloc’s attempts to recapitalise Spain’s troubled banking system, which S&P said would force the country’s debt burden to “balloon”.
“Against the backdrop of a deepening economic recession, we believe that the government’s resolve will be repeatedly tested by domestic constituencies that are being adversely affected by its policies,” S&P said.
“Accordingly, we think the government’s room to contain the crisis has diminished.”
The euro fell against the US dollar after the news, trading down 0.1pc late in the session on Wall Street.
The downgrade comes after Spain announced five austerity packages in less than a year and is fighting for time to avoid a full-fledged rescue.
Concerns over the creditworthiness of the government have risen since the country requested €100bn (£80bn) in aid to bail-out its banks.
The cut puts S&P in line with rival rating agency Moody’s, which has the recession-hit country on review for another downgrade.
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