S&P Warns Spain on Sovereign Debt Rating

Standard & Poor's warned Spain on Monday it could cut its sovereign debt rating as the global slowdown brought an abrupt end to years of strong growth and sent its public finances spinning into deficit.

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The credit rating agency said it was concerned about Spain's high private sector debt and worsening public finances after it entered recession in the fourth quarter. A creditwatch listing signals a potential but not inevitable downgrade.

"The Creditwatch placement reflects our view of the significant challenges facing the Spanish economy as it traverses a period of very weak growth," Standard & Poor's said in a statement.

The euro extended losses versus the U.S. dollar and the yen on Monday after Standard & Poor's gave Spain the ratings alert, while euro zone government bond futures hit a fresh session high. The Spanish 10-year government bond yield spread stayed near historic wides against benchmark German Bunds after ratings agency S&P said it might cut Spain's "AAA" rating.

The 10-year Spanish/Bund spread was last at 92.3 basis points, having reached 92.6 basis points -- the widest since at least 1999, according to Reuters charts. Spain's economy ministry did not expect S&P to carry out its threat and said the government of Prime Minister Jose Luis Rodriguez Zapatero would put public accounts in order.

"The economic policy of this government is precisely aimed at overcoming those imbalances which led S&P to that situation of Creditwatch," said an economy ministry spokeswoman.

Standard & Poors said Spain had to cut public spending in line with lower government revenues and forecast Spain's general government deficit would override an European Union limit of 3 percent of GDP until 2011, peaking above 6 percent in 2009.

"We've known that the fiscal finances were deteriorating in these countries quite rapidly for some time now. The fact that (Spain's ratings) are on watch is not a huge surprise -- it would be a bigger surprise if it does actually translate into a downgrade," said Sean Maloney, fixed-income strategist at Nomura in London.

On Friday, Standard & Poor's warned fellow euro zone members Greece and Ireland that it could cut their sovereign debt ratings as the global slowdown brought an abrupt end to years of solid growth and placed public finances under increasing strain.

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