Standard and Poor's has lowered its credit rating outlook for Spain, warning that a downgrade could follow unless the government of Prime Minister José Luis Rodriguez Zapatero (photo) takes "aggressive action" to balance the country's finances.
Standard and Poor's lowered its credit rating outlook on eurozone-member Spain to "negative" from "stable" on Wednesday, warning that the country faced a "prolonged" period of sluggish economic growth.
"Compared to its rated peers, we believe that Spain faces a prolonged period of below-par economic performance, with trend GDP growth below 1.0 percent annually, due to high private sector indebtedness and an inflexible labor market," it said in a statement.>
The ratings agency said a downgrade could come in the next two years if the authorities do not take "more aggressive actions" to tackle fiscal and external imbalances.
"However, given the relatively strong starting position of the public finances, we believe that there is time for the government to forge a political consensus supporting a credible fiscal consolidation that is consistent with the current rating," it said.
In January Standard and Poor's lowered its long term credit rating for Spain by one notch to AA-plus from AAA.
AAA is the highest possible rating, while AA-plus indicates that Spain has a very strong capacity to repay its borrowings, according to Standard and Poor's scale.
Ratings agencies are used in financial markets to measure the risks of a default by a borrower.
A downgrade in a credit rating make raising money in debt markets more expensive for Spain as investors demand a higher rate of interest to compensate them for the perceived higher level of risk.
Spain has undergone one of the most dramatic reversals in Europe in its public accounts as the government boosts spending to face its worst recession in decades, which drove the unemployment rate to 19.3 percent in October and caused revenues to plunge.
The government expects the public deficit will swell to 9.5 percent of gross domestic product (GDP) this year, well above a European Union limit of 3.0 percent and after posting a surplus of 2.2 percent as recently as 2007.
Prime Minister Jose Luis Rodriguez Zapatero has vowed to bring the public deficit within the EU limit of 3.0 percent of GDP by 2012 but many economists are sceptical given Spain's high unemployment rate, which the second-highest in the bloc after Latvia's.
His Socialist government has launched a massive public works programme to provide jobs, which has torn up vast swatches of Spanish cities as workers extend or repair roads and pavements, and has introduced a new monthly subsidy for people whose unemployment benefits have run out.
Spain's gross domestic product contracted 0.3 percent in the third quarter, its fifth straight quarterly decline, even as the entire eurozone officially joined the United States and Japan in emerging from recession during the same period.
Europe's fifth-biggest economy has proved especially vulnerable to the global credit crunch because growth relied heavily on credit-fueled domestic demand and a property boom boosted by easy access to loans.
Spain received a triple A rating from Standard and Poor's for the first time in 2004.