S&P cuts Spain’s credit rating to lowest investment grade

NEW YORK- Associated Press

The Spanish flag flies at the Plaza de Cibeles in Madrid. S&P cut Spain’s sovereign debt rating by two notches to just above junk level, citing the deepening recession and strains from the country’s troubled banks. AFP photo

Standard & Poor’s downgraded its rating on Spain’s debt on Oct. 10 by two notches, leaving it on the cusp of junk status.
 
A grinding recession, high unemployment and social unrest are limiting the government’s options for stemming the country’s financial crisis, S&P said.
The credit-rating agency now rates debt issued by Spain BBB-, its lowest investment-grade status. It had been BBB+.

S&P also assigned a negative outlook to the rating, saying it could be further downgraded if Spain’s economic conditions erode further.
 
“Overall, 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.

Recapitalization likely to add more debt

It also cited difficulty in predicting the extent to which other countries in the 17-nation eurozone would come to Spain’s aid. It had previously assumed a key European bailout fund would help recapitalize the country’s shaky banks without piling more debt on the central government in Madrid. But now any recapitalization plan will likely add more debt, S&P said.

Investors are worried that Spanish banks could collapse under the weight of an imploding real-estate market. Tensions between Spain’s indebted regional governments and the central government were also cited by S&P for its downgrade.

S&P estimates Spain’s economy will contract by 1.8 percent in 2012 and another 1.4 percent in 2013.
 
Spanish unemployment is near 25 percent. Last month, the European Central Bank agreed to buy unlimited amounts of debt by struggling European countries like Spain to help lower their borrowing costs. But the governments first need to apply for bailout.

Spain has not applied for a bailout yet. Instead, the government has introduced a series of austerity and labor measures in a bid to bring down its deficit and convince investors it can manage its finances without outside help.

Meanwhile, Spain’s inflation rate surged to a 17-month high in September, driven by an austerity-driven rise in sales tax and medicine prices, official figures showed yesterday.

Consumer prices rose 3.5 percent over the year to September, the highest rate since April last year and a sharp climb from the 2.7 percent rate recorded in August, said the National Statistics Institute.