S&P Downgrades Spanish Debt

The Spanish government's dilemma over whether to request a European bailout has become more acute following a downgrade of the cash-strapped country's credit rating. Standard & Poor's late yesterday cut its rating on Spain's debt by two notches to BBB-, just a step above junk status, or non-investment grade. That could make it more expensive for the Spanish government to borrow money as it might scare some of its bond investors away. The agency said it was concerned by the deepening economic recession, which has seen unemployment rise to nearly one in four and fueled social discontent.

It also noted that the government's hesitation in requesting a European financial lifeline was "potentially raising the risks to Spain's rating." Though S&P's warning may nudge the Spanish government to make a bailout request sooner rather than later, rival agency Moody's has indicated it may cut its rating for Spain in the event of a bailout request. "The evaluation by Standard and Poor's caught us by surprise," says a Spanish economic official. The government said the downgrade was unjustified but argued that it would have little, if any effect, on its plans to raise money the money markets.