S&P cuts Spain credit rating by two notches

Kasmira Jefford
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STANDARD & Poor’s yesterday slashed Spain’s sovereign credit rating by two notches, citing rising unemployment, social unrest and a deepening economic recession that is limiting the government’s policy options.

The ratings agency cut the country’s long-term credit rating from BBB+ to BBB-, just above junk territory, and warned of possible further downgrades if Spain did not seek financial aid from Europe’s bailout funds.

“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,” S&P said in a statement.

The downgrade, which had been rumoured for weeks, comes with a negative outlook reflecting S&P’s view that there are significant risks to economic growth and budgetary performance, plus a lack of clear direction in Eurozone policies.

The ratings agency said that Spain’s recent budget, which aims to hit a 2012 deficit reduction target of 6.3 per cent of gross domestic product, was overly optimistic and reaching those targets would need extra budgetary measures that could in turn worsen the recession.