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Spain Sovereign Debt Downgraded Again

Posts by Ian Wyatt

On April 26, Standard & Poor’s downgraded Spain’s sovereign debt rating for a second time in 2012. Today, Fitch followed suit.

Like Standard & Poor’s did six weeks ago, Fitch Ratings downgraded Spain’s sovereign debt rating three notches, from A to BBB. A BBB rating is just a step above junk status.

The firm said Spain’s high level of foreign debt has made it more vulnerable to the rapidly spreading European debt crisis. The agency estimated that Spain will need between 60 billion and 100 billion euros to recapitalize its banking sector, up from the 30 billion euros Fitch had previously estimated.

Spain officially entered a recession last month after contracting for two straight quarters. The country contracted 0.3% from January through March.

That pushed the yields on Spain’s 10-year bonds to a six-month high of 6.6% last week. Those yields have since rallied, falling to 6.1% today after a better-than-expected bond auction. Spain sold 611 billion 10-year bonds, 2.1 billion securities all together.

But that may not be enough to save the debt-ridden country from requiring a bailout. Fitch said the reduced sovereign debt rating has “increased the likelihood of external financial support.”