Spain’s Ratings Cut by S&P on Deficit, Bank Bailout Concern

Spain’s sovereign credit rating was cut to BBB+ from A by Standard & Poor’s on concern the nation will have to provide further fiscal support to the banking sector as the economy contracts.

Spain’s short-term rating was lowered to A-2 from A-1, while the outlook on the long-term rating is negative, New York-based S&P said in a statement today.

The nation’s 10-year borrowing costs have climbed about 70 basis points this year as Prime Minister Mariano Rajoy struggles to convince investors he can control public finances amid soaring unemployment and a contracting economy. Banks threaten to disrupt the premier’s efforts as bad loans reach the highest levels in almost two decades.

“Spain’s budget trajectory will likely deteriorate against a background of economic contraction,” S&P wrote in the statement. “At the same time, we see an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector. As a consequence, we believe there are heightened risks that Spain’s net general govern debt could rise further.”

Yields on 10-year Spanish bonds surpassed 6 percent on seven trading days this month, boosting concern that borrowing costs may reach levels that prompted bailouts for Greece, Ireland and Portugal. The rate was 5.83 percent.

Budget Shortfall

The Bank of Spain said April 23 that gross domestic product contracted 0.4 percent in the first quarter, tipping the nation into its second recession since 2009. Rajoy said March 2 that that nation would miss its 4.4 percent deficit target and then agreed 10 days later with euro-region finance ministers to a new goal of 5.3 percent.

Spain’s budget shortfall will reach 6 percent this year and 5.7 percent in 2013, as the government pushes through the deepest budget cuts in at least three decades, according to forecasts from the International Monetary Fund published April 17. Debt will reach 84 percent of GDP next year. While that’s less than France and Italy, it’s up from 40 percent in 2008, when a real estate boom started to collapse.

“We could also consider a downgrade if political support for the current reform agenda were to wane,” the S&P statement said.“ Moreover, we could lower the ratings if we see that Spain’s external position worsens or its competitiveness does not continue to approach that of its trading partners, a key factor for Spain to return to sustainable economic and employment growth.”