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Mariano Rajoy
Many analysts believe Mariano Rajoy's government needs to apply for further funding for Spain to prevent more downgrades. Photograph: Antoine Antoniol/Getty Images
Many analysts believe Mariano Rajoy's government needs to apply for further funding for Spain to prevent more downgrades. Photograph: Antoine Antoniol/Getty Images

Downgrade raises pressure on Madrid to accept bailout

This article is more than 11 years old
S&P says it has lowered the rating on Spain's debts two notches – to BBB- – following slump in country's fortunes

Spain's government came under pressure on Wednesday night to accept rescue funds from Brussels after the credit ratings agency Standard & Poor's downgraded the country to BBB-, just above junk status.

S&P said it had lowered the rating on Spain's debts two notches following a slump in its fortunes that meant its recession would be longer and unemployment higher than expected.

The agency also cited the increase in social unrest and the probable rise in tensions between central government and the regions.

"The downgrade reflects our view of mounting risks to Spain's public finances, due to rising economic and political pressures," said the ratings agency. "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, and therefore, in accordance with our rating methodology, we have lowered the rating by two notches."

S&P attached a "negative outlook" to its rating, a warning of another possible downgrade in the medium term.

Rival ratings agency Moody's is considering the situation in Madrid and is expected to issue its own downgrade within days. It is likely to tell investors that Spain's limited scope for improvement means its debt should be considered junk. That would mean many of the world's largest investment funds, including British pension funds, would be forced to sell their loans to Spain.

S&P said it would drop the country's debt status one notch further if political support for Madrid's reform agenda weakened. It added that another downgrade would also follow if Spain's borrowing costs reached unsustainable levels or if debt topped 100% of GDP.

The rating agency doubts the 17-member euro currency union will support attempts to boost Spain's troubled banking system following dissent from Finland and other countries keen to limit the extent of bailout funds. S&P said the country's debt burden would "balloon" without access to EU funds.

"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.

"Accordingly, we think the government's room to contain the crisis has diminished."

Spain's economy is shrinking and its banks are struggling under the weight of a collapsed real estate market.

The European Central Bank has agreed to buy Spanish government bonds to help lower borrowing costs, but the government first needs to apply for a bailout.

The right-of-centre government of Mariano Rajoy has accepted funds to boost the country's banks, but many analysts believe his administration needs to apply for further funding, either from the ECB or Brussels, to prevent further ratings downgrades.

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