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Spain's Credit Rating Is Cut for Second Time by S&P

Spain's credit rating was cut for the second time this year by Standard & Poor's, which cited a "deterioration" in the country's budget deficit trajectory.

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S&P said Thursday that it is increasing likely the Spanish government will need to provide further fiscal support to the banking sector.

Spain's long-term debt was cut to Triple-B plus from A, while its short-term rating was lowered to A-2 from A-1.

S&P's outlook on Spain's long-term rating is now negative.

In January, S&P downgraded Spain as well as eight other euro zone countries, including France and Austria of their coveted triple-A status, but not EU paymaster Germany.

The latest downgrade of Spain reflects S&P's view of mounting risks to Spain's net general government debt as a share of GDP "in light of the contracting economy."

The agency has lowered its forecast for GDP to contract in real terms by 1.5 percent in 2012 and 0.5 percent for 2013. It had previously forecast real GDP growth of 0.3 percent in 2012 and 1 percent in 2013.

The biggest drags on Spain's GDP, says S&P, are declining disposable incomes, private-sector deleveraging, and the government's "front-loaded" fiscal consolidation plan (austerity).

For these reasons, the agency calls for euro zone policy makers to stabilize capital flows, and improve investor confidence by pooling both fiscal resources and obligations with other euro zone nations.

Effectively, the S&P is calling for European fiscal union to improve Spain's financial situation.

While it gives credit to the European Central Bank's recent long-term repurchase operations (LTROs) with "significantly" reducing the risks the Spanish banking sector faced in refinancing its medium-term debt, these measures "lack effectiveness" over the long-term.

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