14 October 2011 Last updated at 04:40 ET

S&P downgrades Spain on weak growth outlook

 

Madrid resident: "Things are bad... prices down, sackings"

Standard & Poor's (S&P) has cut Spain's long-term credit rating by one notch, from AA to AA-, because of weak growth and high levels of private sector debt.

The ratings agency added that the country's high unemployment would remain a drag on the economy.

Last week, the Fitch agency also cut Spain's rating, a process that can raise a country's borrowing costs.

S&P's move comes as G20 finance ministers are due to meet on Friday to discuss the eurozone crisis.

On Thursday, Fitch downgraded the creditworthiness of UK banks Lloyds and Royal Bank of Scotland (RBS), and also Switzerland's UBS.

'Weaken further'

Explaining its decision to downgrade Spain, S&P said: "Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain's main trading partners."

It noted the "incomplete state" of labour market reform, and added: "The financial profile of the Spanish banking system will, in our opinion, weaken further."

People prepare for the protest march in Madrid

S&P also warned of a further ratings cut if Spain's economy worsens.

Its move comes as activists opposed to the Spanish government's continuing austerity measures, the so-called "indignants", are due to hold a protest march in Madrid on Saturday.

In addition to downgrading UBS, Lloyds and RBS, Fitch said it had put 12 other banks on notice that they may receive the same treatment.

The other lenders it has warned include Germany's Deutsche Bank and US group Goldman Sachs.

Fitch said it noted "increased challenges" facing the financial markets as the eurozone debt crisis and government spending cuts continue to affect banks.

Last week, Fitch fuelled concerns about the debt crisis when it downgraded Spain and Italy, citing the "intensification" of the eurozone's economic and financial problems.

Political moves

The euro fell to $1.3723 immediately following S&P's announcement, before recovering to $1.3774 in early Friday trading.

Analysts said this was due to optimism that the G20 meeting of finance ministers may announce new agreements on tackling the crisis in the eurozone.

However, other commentators say any firm decisions on the eurozone will not likely be announced until the meeting of EU leaders on 23 October.

One expected agreement will be increasing the funding and powers of the European Financial Stability Facility, the fund set up to help national governments in financial difficulty.

Measures to protect European banks with high levels of exposure to eurozone national debt are also expected to be decided.