April 27 (Bloomberg) -- Spain’s sovereign credit rating was cut for the second time this year by Standard & Poor’s on concern that the country will have to provide further fiscal support to banks as the economy contracts.
S&P lowered Spain to BBB+ from A, with a negative outlook. Spain’s short-term rating was reduced to A-2 from A-1, New York- based S&P said in a statement yesterday. The yield on Spain’s 10-year bond rose 16 basis points to 5.99%.
The nation’s 10-year borrowing costs have climbed about 70 basis points this year as Prime Minister Mariano Rajoy struggles to convince investors he can control public finances amid soaring unemployment and a contracting economy. Banks threaten to disrupt the premier’s efforts as bad loans reach the highest levels in almost two decades.
“Spain’s budget trajectory will likely deteriorate against a background of economic contraction,” S&P wrote in the statement yesterday. “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.”
Spanish banks won’t need external aid, nor will Spain need a bailout from its European Union partners, Economy Minister Luis de Guindos said.
“Nobody has asked Spain, either officially or unofficially” to turn to Europe’s bailout mechanisms, he said in an interview in Madrid late yesterday. “We don’t need it.”
S&P first cut Spain this year along with France and other European nations on Jan. 13. Since then, the yield on Spain’s 10-year bonds have risen to 5.99% from 5.22%, while borrowing costs for France are little changed at 2.98%. Spain’s yields are up from about 4.13% in January 2009, when S&P stripped it of its top AAA rating.
The rate cut won’t necessarily lead to higher yields. In the aftermath of S&P’s decision in August of last year to strip the U.S. of its AAA rating 10-year Treasury rates declined, falling to a record 1.67% on Sept. 23.
Yields on 10-year Spanish bonds surpassed 6% on seven trading days this month, boosting concern that borrowing costs may reach levels that prompted bailouts for Greece, Ireland and Portugal. The rate was 5.83%.
The Bank of Spain said April 23 that gross domestic product contracted 0.4% in the first quarter, tipping the nation into its second recession since 2009. Rajoy said March 2 that the nation would miss its 4.4% deficit target and then agreed 10 days later with euro-region finance ministers to a new goal of 5.3%.
Spain’s budget shortfall will reach 6% this year and 5.7% in 2013, as the government pushes through the deepest budget cuts in at least three decades, according to forecasts from the International Monetary Fund published April 17. Debt will reach 84% of GDP next year. While that’s less than France and Italy, it’s up from 40% in 2008, when a real estate boom started to collapse.
“We could also consider a downgrade if political support for the current reform agenda were to wane,” the S&P statement said. “Moreover, we could lower the ratings if we see that Spain’s external position worsens or its competitiveness does not continue to approach that of its trading partners, a key factor for Spain to return to sustainable economic and employment growth.”
Spanish banks probably need 50 billion euros of additional capital, Morgan Stanley analysts estimate. The figure may rise to as much as 160 billion euros in a worst-case scenario, said Elaine Lin, a strategist at Morgan Stanley in London. The banks could try to raise the capital themselves or get it from either the Spanish government or the European Financial Stability Facility, she said.
Governments committed more than $430 billion in fresh money to the International Monetary Fund to help it protect the world economy against deepening debt turmoil in Europe. The near-doubling of the fund’s firepower was announced after Group of 20 finance ministers and central bankers met April 20 in Washington.