WASHINGTON — Moody's slashed Spain's credit rating by three notches Wednesday, days after the government set a deal to borrow 100 billion euros ($125 billion) to shore up its banks.
"This will further increase the country's debt burden, which has risen dramatically since the onset of the financial crisis," Moody's said.
The rating was dropped three levels from A3 to Baa3, the lowest level of "investment grade" or just above "speculative" or "junk" grade.
The downgrade came after Spain requested a rescue for its banks from the European Union's emergency fund on Saturday, a move that will pass the 100 billion euros through the government to the banks -- meaning the debt is added to Madrid's already outsized official borrowings.
"While the details of the support package have yet to be announced, it is clear that the responsibility for supporting Spanish banks rests with the Spanish government," the ratings agency said.
The borrowing "will materially worsen the government's debt position," Moody's said, projecting the country's public debt ratio to hit 90 percent of GDP this year and to continue rising through 2015.
Moreover, Moody's pointed to Madrid's increasingly limited access to financial markets for funding -- a problem that has some analysts speculating it could need a broader bailout.
The Spanish economy's continued weakness "makes the government's weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern," Moody's said.
However, the agency said Spain still merited an "investment grade" rating because of "the underlying strength of the Spanish economy and the government's clear desire to reverse the debt trajectory through a strong fiscal consolidation program."
But Moody's left Spain on review for a further downgrade, which it said could come within three months.
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