Standard & Poor’s (S&P) on Thursday lowered Spain’s long-term credit rating by two notches, saying the country’s budget problems were likely to get worse because of a weak economy.
S&P reduced Spain’s long-term sovereign credit rating to “BBB+” from “A.” The agency also lowered Spain’s short-term rating and assigned a negative outlook, which suggests the possibility of another downgrade in the near future.
Spain’s credit rating is still in investment grade, three notches above junk status. Nonetheless, the lower rating could increase the nation’s borrowing costs because investors will likely demand higher interest rates to compensate for the greater risk implied by the downgrade.
However, it is nowhere near Greece, which was downgraded to default by the three major rating agencies after its private creditors were forced to take the biggest debt writedown in history. The agencies — S&P, Moody’s and Fitch — are expected to raise Greece’s rating after it completed this week a huge bond exchange designed to more than halve its privately held debt.
S&P’s downgrade of Spain, announced after the close of markets in the US, was not a total surprise. Moody’s, cut Spain’s rating two notches in February due to the country’s difficult fiscal outlook.
S&P cited the risk that Spain’s government debt would expand as the contracting economy exacerbates the nation’s budget woes. The Spanish central bank confirmed this week that Madrid is in recession for the second time in three years.
S&P also noted the “increasing likelihood” that the Spanish government would need to provide further help for the banking sector.
To go along with the credit downgrade, S&P lowered its forecast for Spain’s economic outlook. The agency said it expected the economy to contract by 1.5 percent this year and 0.5 percent next year. Its previous outlook was growth of 0.3 percent this year and 1 percent next year.
Spain’s new conservative government has forecast that the economy will contract 1.7 percent this year.