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S&P has said its recent downgrade of Spain's sovereign rating could have a negative impact on the creditworthiness of the Spanish banks it rates, among them Santander (NYSE: SAN) and BBVA (NYSE: BBVA), which derive a large chunk of their revenues from Latin America.
S&P lowered Spain's rating on Wednesday by two notches to BBB-, one notch above junk status, as the deepening economic recession is limiting the government's policy options, while rising unemployment and spending constraints are likely to intensify social discontent.
Furthermore, the Spanish government's hesitation to agree to a financial lifeline that would likely significantly lower the sovereign's financing costs via purchases by the European Stability Mechanism and European Central Bank (ECB) is raising the downside risks to Spain's rating, S&P said in a report.
Analysts believe the ratings decision should accelerate the process of Spain having to request a bailout, a move that the country has been delaying as the ECB's recently announced crisis plan has cut borrowing costs.
Last month, ECB president Mario Draghi said the entity would buy unlimited amounts of debt of struggling European countries, but governments need to apply for a rescue mechanism first.
Spain's deputy economy minister Fernando Jiménez Latorre said S&P's decision "caught us by surprise." "We don't agree" with its reasons, he was quoted as saying by Spanish newspaper El Mundo.
While recent independent stress tests for the Spanish banking system have revealed that Santander and BBVA are among seven financial groups without need for additional capital, S&P's downgrade of the sovereign could cause other agencies to follow suit and cut the ratings of Spanish companies and their subsidiaries after that.
Moody's is due to complete its review of Spain's sovereign rating - which currently stands just one notch away from losing investment grade - at some point this month.
"Even the prospect of seeing the two major agencies rating Spain below investment grade will lead to widespread selling over the coming month, unless the public sector wants to pick up the tab," Marc-Henri Thoumin, fixed income strategist at Société Générale, wrote in a note to investors.