Fitch today chopped Spain’s credit rating by three notches to BBB – just above junk status – citing the growing cost of bailing out the country’s debt-stricken banks, its deepening recession and the risk of contagion from Greece.
The ratings agency also placed Spain on negative outlook, leaving the door open to further downgrades in the coming months, Reuters reported.
Fitch said the likely cost of rescuing the Spanish banking sector was between 60 billion euros and 100 billion euros ($75 billion to $125 billion) – more than double its previous estimate of 30 billion euros, according to Agence France-Presse.
“The much reduced financing flexibility of the Spanish government is constraining its ability to intervene decisively in the restructuring of the banking sector and has increased the likelihood of external financial support,” Fitch said in a statement cited by Bloomberg.
“Spain’s high level of foreign indebtedness has rendered it especially vulnerable to contagion from the ongoing crisis in Greece.”
There are growing expectations for a European rescue of the Spanish banking system.
Earlier today, Jean-Claude Juncker, head of the Eurogroup finance ministers, said the euro zone would recapitalize Spain’s banks if Madrid made such a request, AFP reported.
Spain’s borrowing costs continue to increase, signaling weakening confidence in the government’s ability to repay its debts.
At an auction earlier today, the rate on 10-year Spanish bonds was 6.044 percent, up from the 5.743 percent from the last auction in April, the BBC noted.
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