Credit rating agency Moody’s has downgraded Spain’s government bond rating to Baa3 from A3, and has also placed it on review for possible further downgrade.
The agency said in a statement its decision reflected a number of key factors.
"The Spanish government intends to borrow up to €100 billion from the European Financial Stability Facility (EFSF) or from its successor, the European Stability Mechanism (ESM), to recapitalise its banking system. This will further increase the country's debt burden, which has risen dramatically since the onset of the financial crisis."
Furthermore, the Spanish government had "very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalisation funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from the ECB".
Moody's said the Spanish economy's continued weakness made the government's weakening financial strength and its increased vulnerability to a sudden stop in funding "a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years".#
It said it expected to conclude the review within a maximum timeframe of three months.