Standard & Poor's today cut the credit rating of Spain and warned it could face another downgrade as the country's sluggish economy could hurt efforts to cut the public deficit.
S&P lowered Spain's long-term sovereign credit rating to 'AA' from 'AA+' and said the outlook was negative.
'In our opinion, Spain is likely to have an extended period of subdued economic growth, which weakens its budgetary position,' the agency said in a statement.
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 yesterday.
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.
Standard & Poor's has now downgraded Spain twice since the global economic crisis started. The other two, Moody's and Fitch, maintain Spain on their top ratings.
Spain's Socialist government has promised to cut its budget deficit from 11.2% of GDP in 2009 to the EU limit of 3% by 2013 with measures including a hike in value added tax and a freeze on civil servants' pay. Government officials said the S&P downgrade would not put in doubt plans to cut the budget deficit.
Meanwhile, Spain this evening appealed for market calm after the downgrading, with the deputy prime minister saying the government was cutting the public deficit.
Spain's benchmark Ibex-35 share index closed 2.99% lower this evening.
Rating agencies should not be 'believed too much', International Monetary Fund chief Dominique Strauss-Kahn said today after Greece, Portugal and Spain's credit ratings were cut.
Agencies like Standard & Poor's 'are reflecting what they are collecting in the market. One should not believe too much what they say, even if they are useful,' Strauss-Kahn said.
