Fitch cuts Spain’s rating three notches to BBB

A trader looks at his screens during a bond auction on a trading floor in Madrid June 7, 2012 (Reuters / Andrea Comas)
Fitch Ratings moved to cut Spain’s sovereign credit rating from A to BBB, a three-notch downgrade that has put the country a mere two notches above junk status. The agency further predicts a negative outlook for Spanish debt's creditworthiness.

Fitch said the Spanish downgrade reflected several realities, including the high cost of “restructuring and recapitalizing” the country's banking sector, massive government debt that is expected to peak at 95 per cent of GDP in 2015, Spain’s high level of foreign indebtedness, and the likelihood that the current recession will last well into 2013.

Fitch further cited contagion from Greece and the unlikelihood that the Spanish government had the resolve to intervene decisively to restructure the banking sector as reasons for the cut. The agency noted "the latest episode of the systemic eurozone crisis" following the inconclusive May 6 Greek general election as a factor that had darkened Spain's economic prospects.

The new rating was Spain's lowest among the "Big Three" credit rating agencies, the other two being Moody's and Standard & Poor's.

The downgrade follows a newfound pessimism on the part of Spanish Prime Minister Mariano Rajoy. On Thursday, Rajoy backed away from his position that Spain’s banking sector would not need an external bailout. He said that before speculating on how much the banking sector might need for recapitalization, the outcome of an IMF report next week and two further independent audits were needed.

Previously, Rajoy had towed the line that despite the implosion of a housing bubble which left Spanish banks saddled with a high percentage of foreclosed-upon properties and non-performing loans, an external rescue would not be necessary

Fitch for its part predicted the cost of recapitalizing the banking sector at between 60 billion and 100 billion euro.

Meanwhile, German Chancellor Angela Merkel stressed on Thursday that Germany and the 16 other members of the common currency were willing to do whatever it takes to rescure the eurozone.

“We have created the instruments necessary to support (countries) in the eurozone, and that Germany is willing to apply these instruments whenever necessary,'' she insisted.

 Her comments followed talks with British Prime Minister David Cameron, who called for "urgent action" to get the debt crisis under control.

Several European leaders have been keen to bail out Spain internally so as to cut the IMF and its conditions out of the picture.

Spain, for its part, has been equally reluctant to ask for a helping hand from other eurozone members. Under the current system, any aid would be given directly to the Spanish government, giving Brussels carte blanche to dictate policies to Madrid.

If Spain ultimately folds and seeks outside help to recapitalize it banks, it would likely request funds from the 440 billion euro European Financial Stability Facility (EFSF) or the soon to be launched European Stability Mechanism (ESM).