After the bell, S&P downgraded Spain’s long-term credit rating to ‘BBB+’ from ‘A.’ While certainly not a surprise, the timing was a bit unexpected. The euro fell after the downgrade, and was recently at $1.3207. 

In February, Moody’s cut Spain’s credit rating to A3 from A1, saying that the “country’s challenging fiscal outlook is being exacerbated by the larger-than-expected fiscal slippage in 2011, mainly on account of budget overshoots by Spain’s regional governments.” 

The outlook on Spain’s credit rating is “negative,” which is three notches above “junk” status.

Here’s the beginning of the press release from S&P explaining the Spain downgrade:

Standard & Poor’s Ratings Services today said it lowered its long-term sovereign credit rating on the Kingdom of Spain to ‘BBB+’ from ‘A’. At the same time, we lowered the short-term sovereign credit rating to ‘A-2′ from ‘A-1′. The outlook on the long-term rating is negative.

Our transfer and convertibility (T&C) assessment for Spain, as for all  European Economic and Monetary Union (EMU or eurozone) members, is ‘AAA’, reflecting Standard & Poor’s view that the likelihood of the European Central Bank (ECB) restricting non-sovereign access to foreign currency needed for debt service of non-euro obligations is low. This reflects the full and open access to foreign currency that holders of euro currently enjoy and which we expect to remain the case in the foreseeable future.

The downgrade reflects our view of mounting risks to Spain’s net general government debt as a share of GDP in light of the contracting economy, in particular due to:

– The deterioration in the budget deficit trajectory for 2011-2015, in contrast with our previous projections, and

– The increasing likelihood that the government will need to provide further fiscal support to the banking sector.

Consequently, we think risks are rising to fiscal performance and flexibility, and to the sovereign debt burden, particularly in light of the increased contingent liabilities that could materialize on the government’s balance  sheet.

These concerns have led us to conclude a two notch downgrade is warranted in accordance with our methodology.