S&P: Spain ratings lowered to 'BBB-/A-3' on mounting economic and political risks; outlook negative

10 October 2012

In Standard&Poor's 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.

Standard & Poor's Ratings Services said it lowered its long-term sovereign credit rating on the Kingdom of Spain to 'BBB-' from 'BBB+'. At the same time, it lowered the short-term sovereign credit rating to 'A-3' from 'A-2'. The outlook on the long-term  rating is negative.

The downgrade reflects S&P's view of mounting risks to Spain's public finances,  due to rising economic and political pressures. The central government's  policy responses are likely to be constrained by:

• severe and deepening economic recession that could lead to increasing  social discontent and rising tensions between Spain's central and regional governments;
• a policy-setting framework among the eurozone governments that in S&P's opinion still lacks predictability. S&P's understanding from recent statements is that the Eurogroup's commitment to break the vicious circle  between banks and sovereigns, as announced at a summit on June 29, does not extend to enabling the European Stability Mechanism to recapitalise large ongoing European banks. S&P's previous assumption (which was a key  factor in its decision to affirm the ratings on Spain on August 1, 2012)  was that official loans to distressed Spanish financial institutions  would eventually be mutualised among eurozone governments and thus Spanish net general government debt would remain below 80 per cent of GDP beyond  2015.

Press release

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