S&P lowered the long-term grade to BBB+ from A, with a negative outlook. Spain’s short-term rating was reduced to A-2 from A-1, New York-based S&P said in a statement yesterday.

The nation’s 10-year borrowing costs have climbed about 70 basis points this year as Prime Minister Mariano Rajoy struggles to convince investors he can control public finances amid soaring unemployment and a contracting economy. Banks threaten to disrupt the premier’s efforts as bad loans reach the highest levels in almost two decades.

“Spain’s budget trajectory will likely deteriorate against a background of economic contraction,” S&P wrote in the statement yesterday. “At the same time, we see an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector. As a consequence, we believe there are heightened risks that Spain’s net general govern debt could rise further.”

This is the second downgrade of Spain by S&P this year. The firm cut Spain along with France and other European nations on Jan. 13. Since then, the yield on Spain’s 10-year bonds have risen to 5.83 percent from 5.22 percent, while borrowing costs for France are little changed at 2.98 percent. Spain’s yields are up from about 4.13 percent in January 2009, when S&P stripped it of its top AAA rating.

Spanish Bonds

Yields on 10-year Spanish bonds surpassed 6 percent on seven trading days this month, boosting concern that borrowing costs may reach levels that prompted bailouts for Greece, Ireland and Portugal. The rate was 5.83 percent.

The Bank of Spain said April 23 that gross domestic product contracted 0.4 percent in the first quarter, tipping the nation into its second recession since 2009. Rajoy said March 2 that the nation would miss its 4.4 percent deficit target and then agreed 10 days later with euro-region finance ministers to a new goal of 5.3 percent.

Spain’s budget shortfall will reach 6 percent this year and 5.7 percent in 2013, as the government pushes through the deepest budget cuts in at least three decades, according to forecasts from the International Monetary Fund published April 17. Debt will reach 84 percent of GDP next year. While that’s less than France and Italy, it’s up from 40 percent in 2008, when a real estate boom started to collapse.

Political Support

“We could also consider a downgrade if political support for the current reform agenda were to wane,” the S&P statement said. “Moreover, we could lower the ratings if we see that Spain’s external position worsens or its competitiveness does not continue to approach that of its trading partners, a key factor for Spain to return to sustainable economic and employment growth.”

Spanish banks probably need 50 billion euros of additional capital, Morgan Stanley analysts estimate. The figure may rise to as much as 160 billion euros in a worst-case scenario, said Elaine Lin, a strategist at Morgan Stanley in London. The banks could try to raise the capital themselves or get it from either the Spanish government or the European Financial Stability Facility, she said.

Governments committed more than $430 billion in fresh money to the International Monetary Fund to help it protect the world economy against deepening debt turmoil in Europe. The near-doubling of the fund’s firepower was announced after Group of 20 finance ministers and central bankers met April 20 in Washington.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Cheyenne Hopkins at Chopkins19@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net; Christopher Wellisz at cwellisz@bloomberg.net

http://www.bloomberg.com/news/2012-04-26/spain-cut-by-s-p-for-2nd-time-this-year-on-banks-economy.html

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