S&P downgrades Spain's debt rating on weak economy

October 13, 2011 - 8:55 PM

NEW YORK (AP) — Standard & Poor's on Thursday downgraded its long-term debt rating on Spain, citing the country's weak growth prospects and risks facing its banks.

The Spanish economy is burdened by high unemployment, tight credit, heavy private-sector debt loads and prospects that its main trading partners will also stumble, S&P said in a statement.

"Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects," it said.

Spain's banking system will also likely weaken further as the pile of troubled assets rises, S&P said.

It cut its long-term rating to "AA-" from "AA." The outlook on the rating is "negative," which implies it could be lowered again at some point. But it affirmed its short-term rating of "A-1+" on Spain.

Spain is struggling to emerge from nearly two years of recession, and investors are fretting that Spain's soft economy will make servicing the country's debts increasingly difficult.

As a result, investors are asking for higher rates to lend money to Spain, raising fears that it could be next in Europe to require a rescue package. The S&P downgrade will likely further increase the cost of borrowing.

Moody's Investors Service has also warned it could soon downgrade Spain.

S&P said it now expects the Spanish economy, the fourth-largest in the eurozone, to grow about 0.8 percent this year and about 1 percent next year. Earlier this year, it had been forecasting 2012 growth of 1.5 percent.