Standard & Poor's cut Spain's sovereign credit rating to BBB-minus, just above junk territory, citing a deepening economic recession that is limiting the government's policy options to arrest the slide.
The S&P downgrade comes with a negative outlook reflecting the credit ratings agency's view that there are significant risks to economic growth and budgetary performance, plus a lack of a clear direction in Euro zone policies.
”In our 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, S&P said in a statement.
S&P two-notch downgrade from BBB-plus brings it in line with Moody's Investors Service's Baa3 rating. Moody's has Spain on review for a possible downgrade.
Both firms have Spain just on the cusp of junk status. Fitch Ratings has a BBB rating on Spain, one notch higher but also with a negative outlook.
Spain has been in recession since earlier this year, its second economic contraction in just a few years, and unemployment is stubbornly high at close to 25% with a return to job creation still two years away.
Falling tax revenue and rising costs of unemployment benefits are confounding the government's efforts to hit a 2012 deficit reduction target of 6.3 percent of gross domestic target agreed with the European Union.
In related news the IMF prodded the world's rich countries for swifter action on Thursday as Europe's debt crisis drags on while the United States and Japan show scant progress handling their budget deficits.
Christine Lagarde, managing director of the IMF, said political wrangling added to economic uncertainty, slowing growth in both advanced and emerging economies. The IMF cut its global growth forecast this week for the second time since April.
We expect action and we expect courageous and cooperative action on the part of our members” Lagarde said in a news briefing ahead of the IMF's twice-yearly meetings in Tokyo.
The IMF has expressed frustration with Europe's piecemeal response to its debt crisis and warned that a recent respite in borrowing costs for debt-laden countries such as Spain may prove short-lived unless euro zone leaders come up with a comprehensive and credible plan.
The IMF itself is struggling to muster the sort of decisive action that Lagarde wants to see from world leaders. Its 188 member countries meet on Friday and Saturday, and will fall short of a goal to implement voting reforms that would give large emerging economies greater say and elevate China to the No. 3 spot in IMF power.