Spanish bailout dilemma sharpens

Associated Press Modified: October 11, 2012 at 10:16 am •  Published: October 11, 2012
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MADRID (AP) — The Spanish government's dilemma over whether to request a European bailout has become more acute following a downgrade of the cash-strapped country's credit rating.

Standard & Poor's late Wednesday cut its rating on Spain's debt by two notches to BBB-, just a step above junk status, or non-investment grade. By indicating that it's a riskier asset to hold, S&P's downgrade may make it more expensive for the Spanish government to borrow money as it might scare off some of its bond investors.

The agency said it was concerned by the deepening economic recession, which has seen unemployment rise to nearly one in four and fueled social discontent. It also noted that the government's hesitation in requesting a European financial lifeline was "potentially raising the risks to Spain's rating."

Though S&P's warning may nudge the Spanish government to make a bailout request sooner rather than later, rival agency Moody's has indicated it may cut its rating for Spain in the event of a bailout request.

"It would appear that when it comes to the rating Spain is a bit between a rock and a hard place," said Gary Jenkins, managing director of Swordfish Research.

The Spanish government said the downgrade was unjustified but argued that it would have little, if any effect, on its plans to raise money in the money markets.

"The evaluation by Standard and Poor's caught us by surprise," Spain deputy Economy Minister Fernando Jimenez Latorre said Thursday. "We don't agree with its reasons."

Despite the downgrade, Spanish stocks posted solid gains as investors were cheered by some strong U.S. jobs data. And the yield on the country's 10-year bond was more or less unchanged, around the 5.74 percent level, as investors weighed up whether the country would tap a new facility from the European Central Bank.

Last month, the ECB announced a new plan to keep a lid on the borrowing costs of indebted countries like Spain. It said it would buy unlimited amounts of debt of struggling European countries. However, the governments first need to apply for a eurozone bailout and so far the Spain's has balked at the prospect.

Instead, the government led by Prime Minister Mariano Rajoy has introduced a series of austerity and labor measures in a bid to bring down its deficit and convince investors it can manage its finances without outside help.

Though it has raised around 90 percent of the money it needs to service its debts in 2012, Spain will have to tap investors for around €200 billion ($258 billion) in 2013.