Spain got an unpleasant surprise when Standard & Poor's not only downgraded the country's sovereign debt rating two notches to a single level above junk, but also gave it a negative outlook. The ratings agency cited the uncertain economic and political situation in its reasoning.
Bloomberg reported late Wednesday that S&P dropped Spain from BBB+ to BBB- and changed its outlook to negative, as well as dropping the country's short-term sovereign level to A-3 from A-2.
S&P said in a statement that a "deepening economic recession that could lead to increasing social discontent and rising tensions between Spain's central and regional governments" magnifies risks.
It added, "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 lack of a clear direction in eurozone policy. The deepening economic recession is limiting the Spanish government's policy options." It also cited backtracking by peer eurozone countries on a pledge to cut the link between the government of Spain and its banks as it considers a second bailout.
S&P also expressed concern that the government's action will likely be constrained by "a policy-setting framework among the eurozone governments that still lacks predictability."
