Fitch Ratings cut Spain's long-term credit rating to BBB andleft it two notches from junk, citing the cost of recapitalizingthe country's banking industry and a lengthening recession.

Spain, which saw its rating lowered from A, may need as much as100 billion euros ($126 billion) to bolster its banking system,compared with an earlier estimate of about 30 billion euros, Fitchsaid today in London. The Spanish economy is set to remain inrecession through 2013, the ratings company added, havingpreviously forecast a recovery for next year.

“The much reduced financing flexibility of the Spanishgovernment is constraining its ability to intervene decisively inthe restructuring of the banking sector and has increased thelikelihood of external financial support,” Fitch said in astatement. “Spain's high level of foreign indebtedness has renderedit especially vulnerable to contagion from the ongoing crisis inGreece.”

The government managed to auction 10-year debt today amidspeculation that European officials will act to boost growth in thesingle currency area and ease the pressure on peripheral nations.Budget Minister Cristobal Montoro said June 5 that Spain was shutout of capital markets.

“The positive moves we have had this week have been on a strangelogic that things have got so bad that the authorities need to dosomething about it,” said Elisabeth Afseth, an analyst at InvestecBank Plc in London. The cut isn't really a surprise “given wherethe spreads have been, Spain's potential difficulties and the factthey may have to seek support.”

Fitch's reduction by three levels now leaves its assessment ofEurope's fourth-biggest economy on a par with Thailand and Mexico.Standard & Poor's has a BBB+ rating on Spain, while Moody'sInvestors Service grades it A3. Fitch cut the country from AAA inMay 2010.

“It was inevitable,” said David Keeble, head of fixed-incomestrategy at Credit Agricole Corporate & Investment Bank in NewYork. “What really matters is the political will to sort thingsout. Quite clearly Spain is going to need external help.”

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