One week after Fitch downgraded Spain’s credit rating, Standard and Poor’s followed by cutting Europe’s fourth largest economy’s rating by one notch to AA- from AA.
This is the third downgrade for Spain in a span of three years. S&P cited reasons for the downgrade was high unemployment, slow growth, tight credit.
In an official statement, S&P said that “Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain’s growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain’s main trading partners.”
Spain is finding it harder to raise funds in the debt market and its 10-year bond yields have risen to over 5 percent even after the European Central Bank stepped in and bought bonds in August. The gap between Spanish and German 10-year borrowing costs was 310 basis points yesterday, compared with 325 basis points on September 30.
S&P said Spain is in danger of falling back into a recession by next year if growth continued to contract and so could face further downgrades in the near future.
“We could lower the ratings again if, consistent with our downside scenario, the economy contracts in 2012, Spain’s fiscal position significantly deviates from the government’s budgetary targets, or additional labour market and other growth-enhancing reforms are delayed,” S&P said.
The focus now turns to the G20 meetings that are underway in Paris today, with hopes that European leaders will come up with a lasting solution to the sovereign debt crisis.