Standard & Poor downgraded Spain’s debt level to BBB- from BBB+ late on Wednesday, leaving Spain one notch above “junk” status and in a closer position to justify asking for a second EU bailout package in the weeks ahead.
The S&P also assigned a “negative outlook” with new warnings of a possible downgrade in the medium term. The credit agency lowered the short term sovereign credit level to A-3 from A-2.
The S&P downgrade moves it closer with the credit rating from Moody’s, which has Spain on review for a potential downgrade to junk status.
Spain is rated one level above junk by Moody’s Investors Service at Baa3, and two levels higher by Fitch Ratings, which has Spain at BBB in a non- investment grade.
The S&P downgrade comes after Spain announced five highly unpopular austerity packages in less than a year and is desperately attempting to avoid a full scale EU rescue package with even more austerity reform conditions which Madrid must first request before it can be disbursed.
Spain has resisted asking for outside bailout help which allows the European Central Bank (ECB) to buy large quantities of Spanish bonds, lowering borrowing costs for the indebted country which is still coming to terms with a contracting economy that has been damaged by a slumping real estate market and rising unemployment level near 25% of the population.
Madrid decided instead to confront their deficit by introducing five unpopular austerity measures, resulting in protest and unrest across the nation.
“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,” the S&P said.
Spain is facing regional elections on Oct. 21 which may also be a catalyst for delaying a request for a large EU bailout package since a full scale bailout rescue package would come with added reform conditions such as further austerity measures for the Spanish government, a move that could result in more unrest and political division at a time when Catalonia has recently signaled a need for more independence from Madrid.
Regional government administrators in the Catalan city of Barcelona have requested a referendum on independence after Madrid vetoed further fiscal autonomy last month.
Although the S&P had previously estimated that an earlier European banking bailout fund of € 100 billion that is targeted to help Spanish banks would help recapitalize the country’s indebted banks without adding more debt on the central government in Madrid, the credit agency now believes any recapitalization plan will likely add more debt, the S&P said.
The S&P noted further concerns about which other countries in the 17 nation euro area would come to Spain’s aid.
On September 25th top rated credit countries in the Euro area which includes Germany, Finland, and the Netherlands issued a joint statement stating that the EU’s permanent rescue fund, the ESM, should only be utilized to recapitalize banks as a last resort.
Spain has recently published details about stress tests of its banks revealing a € 60 billion shortfall.
The EU Commission embraced the results of the stress tests in a statement, noting that government aid will be determined in the months ahead and that Spanish banks need to file recapitalization plans.