S&P cut Spain’s long term rating to AA today with a negative outlook. From Bloomberg:
S&P said in a statement today that the outlook on Spain is negative, reflecting the chance of a possible further downgrade if the “budgetary position underperforms to a greater extent than we currently anticipate.” Spain was last cut by S&P in January 2009.
The risk premium investors demand to hold Spanish bonds surged to the highest in more than a year today and the price of insuring Spanish bonds against default reached a record as doubts about Greece’s ability to pay its debt spilled over into Spanish and Portuguese markets…
“We now project that real GDP growth will average 0.7 percent annually in 2010-2016,” S&P said.
From the Wall Street Journal:
The ratings agency said that the Spain is likely to have an extended period of subdued economic growth, which weakens its budgetary position. The move sent equities in Spain the U.S. broadly lower, while the euro fell back to a one-year low against the dollar of $1.3131….
In addition, S&P took into account the possibility that Spanish public and private sector borrowing costs could remain elevated this year and next and further slow Spain’s recovery from the current recession.
S&P warned that “additional measures are likely to be needed to underpin the government’s fiscal consolidation strategy and planned program of structural reforms.”
Main factors dampening Spain’s medium-term growth prospects include private sector indebtedness, which S&P estimates is higher than that of many of Spain’s peers, as well as high unemployment, a fairly low export capacity, and an unwinding of the government’s fiscal stimulus as part of its current efforts to reduce general government deficit to 3% of GDP by 2013.