Standard & Poor's Ratings Services on Wednesday cut Spain's long-term sovereign credit rating by two notches to BBB-, one level above junk, saying the deepening economic recession is limiting the Spanish government's policy options to deal with its debt problems.
The rating agency said in its latest statement that the downgrade reflected its view of mounting risks to Spain's public finances, due to rising economic and political pressures.
In S&P's opinion, the central government's policy responses were likely to be constrained by the deepening economic recession that could lead to increasing social discontent and rising tensions between Spain's central and regional governments, and the policy setting framework among the eurozone governments that still lacks predictability.
At the same time, the S&P believed that Spain was enduring a severe and deepening economic recession while rising unemployment and spending constraints were likely to intensify social discontent and contributed to friction between Spain's central and regional governments.
Moreover, the rating agency pointed out that the policy responses from Europe's monetary and political authorities had not been effective in permanently reversing the tight financing conditions faced by large parts of the Spanish private sector.
Mentioning the recently passed 2013 state budget, S&P said that it was based on overly optimistic growth assumptions and meeting the government's deficit targets in 2012 and 2013 will require additional budgetary consolidation measures, which in turn could amplify the economic recession.
Overall, against the backdrop of a deepening economic recession, the S&P believed that the government's resolve will be repeatedly tested by domestic constituencies, which resulted in limited room for the Spanish government to maneuver to contain the crisis.
S&P also put the outlook on Spain's long-term rating at " negative", warning to further lower the ratings if political support for the current reform agenda was waning or eurozone support was failing to engender sufficient confidence to keep government borrowing costs at sustainable levels.
