By Simon Miller
Standard and Poor's (S&P) has downgraded Spain by two notches to BBB+ as the rating agency fears the country will have to borrow more money to bailout banks.
The agency said that it was likely that the economy would deteriorate with the 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."
As a result the long-term sovereign credit rating was lowered from A to BBB+ with a negative outlook while the short-term rating was lowered to A-2 from A-1.
"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," said the agency in a note.
Consequently, we think risks are rising to fiscal performance and flexibility, and to the sovereign debt burden, particularly in light of the increased contingent liabilities that could materialize on the government's balance sheet.
However, it added that despite the unfavorable economic conditions, S&P believed that the new government had been "front-loading and implementing a comprehensive set of structural reforms, which should support economic growth over the longer term".