Spain's sovereign debt was subject to heavy selling by investors yesterday after Standard & Poor's downgraded the debt-ridden country's credit rating to one notch above junk.
"We have seen several downgrades in the recent past, including Portugal, Greece and Italy," said Haissam Arabi, the chief executive at the asset manager Gulfmena Investments in Dubai. "For Spain it has been priced in, and yields have already widened."
Spain's rating was cut by two notches to BBB-, one level above junk, from BBB+, S&P said on Wednesday.
S&P also assigned a "negative outlook" on the country's long-term ratings, placing its ratings in line with its main rival Moody's.
Yields on Spain's 10-year bonds rose six basis points to 5.87 per cent, while the main equity benchmark, the Ibex 35 Index, fell 0.8 per cent in early trading yesterday.
Italy's debt yields also rose yesterday, ahead of an auction of up to €6 billion (Dh28.39bn). "Everyone is waiting for Spain to request officially for a bailout. The downgrade might just be another reminder, pushing the Spanish government further," Mr Arabi said.
The Spanish prime minister Mariano Rajoy is weighing a second bailout amid a deepening recession, stalling on a decision about whether to request European Central Bank and European Union bond purchases to lower borrowing costs.
He has called for more detail on what would be demanded of Spain in return for aid.
The downgrade "confirms that we still have a long way to go with the euro crisis", said Claus Nouveau-Nikolajsen, the head of global markets at ADS Securities in Abu Dhabi.
"It clearly indicates a lack of direction for euro-zone politics and there is no clear statement about where the union is going."
* with Bloomberg News