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S&P lowers Spain’s debt rating a notch to ‘AA-‘

Standard & Poor’s cut Spain’s long-term credit rating by one notch to “AA-” from “AA” with a negative outlook on Thursday, following downgrades to the country’s top banks.

S&P said Spain’s high unemployment, tighter financial conditions and “the likely economic slowdown in Spain’s main trading partners” prompted the downgrade.

“The financial profile of the Spanish banking system will, in our opinion, weaken further,” S&P said.

While the factors that impede Madrid’s recovery of domestic demand “are not unique to Spain,” the agency said that “they impact Spain with particular force given its high level of private sector leverage, much of which is funded externally.”

Lower sovereign credit ratings tend to push up countries’ borrowing costs, a major concern for Spain as it already pays high rates to raise money from nervous debt markets.

S&P cited high short-term external debt, which was at 50 percent of GDP in the second quarter of 2011, leaving “the economy vulnerable to sudden shifts in external financing conditions.”

On Tuesday, Standard & Poor’s downgraded the credit ratings of top Spanish banks, including Santander and BBVA, a move followed by ratings agency Fitch over poor growth prospects.

S&P had said the “tougher-than-previously-anticipated macroeconomic and financial environment in Spain” prompted its downgrade of 10 bank ratings.

The ratings agency recognized that Spain had shown “signs of resilience in economic performance during 2011,” while it slashed spending to reduce its deficit and convince markets it can stay on top of its debt and does not need a bailout.

But the austerity drive has nearly stalled growth, with S&P and others warning Spain risks facing a double-dip recession.

Fitch also slashed Spain’s sovereign credit rating by two notches this month, blaming weak economic growth, the eurozone debt crisis and regional government spending.

It cut Spain’s rating to AA- from AA+ and said the outlook was negative, meaning it could be lowered again.

The Spanish economy slumped into recession during the second half of 2008 as the global financial meltdown compounded the collapse of a property bubble. It stabilized in 2010 but growth remains anemic.

Economic output grew 0.2 percent in the second quarter from the previous three months, after a revised 0.4 percent expansion in the first quarter.