Moody's Investors Service cut its credit rating on Spanish government debt on Wednesday by three notches to Baa3 from A3, saying the newly approved euro zone plan to help Spain's banks will increase the country's debt burden.
Moody's, which warned it could lower Spain's rating further, cited the Spanish government's very limited access to international debt markets and the weakness of the national economy, Reuters reported.
The rating is on review for possible further downgrades, which could come within the next three months, Moody's said.
After the bank bailout, Moody's now expects Spain's public debt ratio to rise to about 90 percent of gross domestic product this year and to continue to rise until the middle of the decade, the Wall Street Journal reported.
Moody's also noted the Spanish government's very limited financial market access is evidenced by its reliance on external funding from the European Financial Stability Facility and the European Stability Mechanism and its growing dependence on its domestic banks as the primary purchasers of its new bond issues -- an unsustainable situation.
Moody's said Spain's rating could also be adversely affected if the risk of a Greek exit from the euro area increases.
Separately, Moody's cut Cyprus's rating to Ba3 from Ba1, placing it three levels below investment grade.
The main reason, Moody's said, was the significant deterioration of the country's outlook as a result of the material increase in the likelihood of a Greek exit from the euro area. Such a scenario would likely increase government support of Cypriot banks, due to their exposure to Greece, as well as the deterioration in domestic macroeconomic conditions.
On Spain, We will of course also take into account whatever the details are that come out on the size and the terms of the (bank) support package, and also take into account what's going on in the wider euro zone in weighing further downgrades, said Kathrin Muehlbronner, a Moody's analyst in London.
That includes both Sunday's election in Greece and an upcoming European summit at the end of the month, she said.
A spokeswoman at Spain's Economy Ministry in Madrid declined to comment.
Moody's now puts Spain's rating one notch above junk status. Standard & Poor's rates Spain two notches higher at BBB-plus with a negative outlook. Fitch Ratings cut Spain's rating by three notches on June 7 to BBB -- one notch above Moody's -- and put a negative outlook on the credit.