S&P slashes Spain's debt rating

NEW YORK (CNNMoney.com) -- Standard and Poor's downgraded the sovereign debt ratings of Spain to a lower investment grade status Wednesday, citing "risks to budgetary position" for the troubled European nation.

Spain's long-term sovereign debt rating was reduced to "AA" from "AA+." The short-term rating was left unchanged at "A-1+."

The downgrade primarily reflects S&P's revision of the country's economic outlook. The ratings agency reduced Spain's 2010-2016 economic growth forecast to an annualized rate of 0.7% from a previous 1%.

"We now believe that the Spanish economy's shift from a credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed," said Marko Mrsnik, S&P credit analyst, in the report.

The ratings action follows Tuesday's downgrade of both Greece and Portugal, which resulted in a precipitous decline in the U.S. stock market.

"This is an expected reaction, because for sometime now, Spain has been in doldrums," said Andreas Carbacho-Burgos, an economist for Moody's Economy.com. "It was not sharing in the output recovery that was happening in Germany, France and Britain."

Other so-called PIIGS nations -- Portugal, Italy, Ireland and Spain -- have seen their borrowing costs spike in recent weeks amid growing concerns that Greece's debt problems could spread. Greek bond yields hit an all-time high Wednesday.

S&P said it considered the possibility that Spain's public and private borrowing costs could remain elevated throughout 2011, further slowing the nation's economic recovery.

"Our conclusion is that challenging medium-term economic conditions will further pressure Spain's public finances," said Mrsnik. "Additional measures are likely to be needed to underpin the government's fiscal consolidation strategy."

The ratings agency placed the country on negative outlook, which implies that future downgrades could be in the offing.

Many analysts say that problems in Europe are unlikely to disappear quickly, and drastic measures in Greece may be needed to put troubled nations back on solid footing.

"Greece is going to have to undergo a massive bailout, which Germany's hesitant to give, or some sort of default," said Carbacho-Burgos.

Although the idea of a default spooks investors, who recall the Argentine debt crisis earlier in the decade, Carbacho-Burgos said an orderly default, managed by the European Union and International Monetary Fund, would be more likely.

"I don't think there would be [a unilateral default]," he said. "That typically happens when there's a change in government, but Greece's prime minister is relatively new and has shown commitment to service debt with help from a bailout."