Global rating major Standard and Poor's (S&P) on Thursday lowered Spain's ratings to 'BBB+/A-2' from 'A/A-1', saying that the country's budget trajectory was likely to deteriorate against a background of economic contraction. It long-term country rating outlook is negative, though still in investment grade, three notches above junk status.
''We believe that the Kingdom of Spain's budget trajectory will likely to deteriorate against a background of economic contraction in contrast with our previous projections. At the same time, we see an increasing likelihood that Spain's government will need to provide further fiscal support to the banking sector. As a consequence, we believe there are heightened risks that Spain's net general government debt could rise further'', S&P said in a statement.
The negative outlook on the long-term rating reflects our view of the significant risks to Spain's economic growth and budgetary performance, and the impact we believe this will likely have on the sovereign's creditworthiness, it added.
Under our revised base-case macroeconomic scenario, we have lowered our forecast for GDP to contract in real terms by 1.5 per cent in 2012 and 0.5 per cent for 2013, S&P said.
The negative drags on GDP include declining disposable incomes, private-sector deleveraging, implementation of the government's front-loaded fiscal consolidation plan, and the uncertain outlook for external demand in many of Spain's key trading partners.
However the rating major has praised the government for the measures taken by it to pull the country out of recession.