S&P cuts Spain's rating one notch on economic view

Standard & Poor's on Wednesday cut its ratings on Spain by one notch to AA from AA-plus, saying a longer-than-expected period of low growth could undermine efforts to cut the budget deficit.

The outlook is negative, reflecting the possibility of another downgrade if Spain's fiscal position worsens more than S&P currently expects, the agency said in a statement.

"In our opinion, Spain is likely to have an extended period of subdued economic growth, which weakens its budgetary position" Standard & Poor's said.

"We now project that real GDP growth will average 0.7 percent annually in 2010-2016, versus our previous expectations of above 1 percent annually over this period" S&P said.

The rating action sent the euro currency sharply lower, to one-year lows against the dollar, as Spain became the third euro periphery country to receive a downgrade by Standard & Poor's this week. Greece and Portugal were downgraded on Tuesday.

Analysts have said that because Spain is a considerably larger economy than debt-riddled Greece and Portugal any worsening of its creditworthiness could create yet bigger headaches for the euro zone as it deals with Athens' crisis.

"Indeed, Spain is the 800 pound gorilla in the room. Greece and Portugal are small countries, but Spain is about five times their size with regards to GDP," said Win Thin, Senior Currency Strategist, at Brown Brothers Harriman in New York.

"The move was not surprising given the downgrades to other countries this week" said Tullia Bucco, an economist at Unicredit. "Spain is under pressure to ensure it makes serious fiscal consolidation steps in an environment of weak growth."

Standard & Poor's has now downgraded Spain during the global economic crisis. The other two, Moody's and Fitch, maintain Spain on their top ratings.

"It seems to be one (downgrade) after the other. Only a few months ago it looked like it was contained to Greece and in the last 24 hours we are seeing the contagion effect having a firm grip across Europe" said Manoj Ladwa, senior trader at ETX Capital.