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Spain's risk assessment downgraded.

Ratings agency Standard & Poor’s has downgraded its risk assessment level for Spain’s banking sector, warning of “high credit losses” during the country’s recession. The move leaves Spain’s banking sector on the same level as that of United States and Britain. “We believe that Spanish financial institutions are likely to operate in a difficult economic environment over a prolonged period,” it said in a statement.

“Spain’s financial system is likely… to suffer high credit losses during the recession, owing to the corporate sector’s high indebtedness, rapid credit expansion, and financial institutions’ meaningful exposure to the Spanish property sector.

“Problem loans will likely peak in 2010, according to our estimates, with higher-than-historical average credit provisions continuing through 2011,” the agency said. As a result the agency has downgraded its Banking Industry Country Risk Assessment (BICRA) rating for Spain “to Group 3 from Group 2,” it said.

The BICRA incorporates Standard & Poor’s “view of the strengths and weaknesses of a country’s banking system compared with those of other countries, according to a scale that ranges from Group 1 (the strongest) to Group 10 (the weakest),” it said. “Today’s revision reflects the greater weight we now attribute in our BICRA for Spain to the risks we see arising from the country’s deteriorated economy,” said Standard & Poor’s credit analyst Elena Iparraguirre.

But she said the Spanish financial sector “faces the difficult economic environment from a sound position… thanks to its robust regulatory and supervisory framework, resilient operating profitability … and the industry’s strong retail banking segment.”

Spanish banks got off relatively lightly from the subprime mortgage crisis in 2008 as the country’s strict regulations meant they did not invest heavily in the high-risk loans that hurt financial institutions elsewhere. S&P said Spain’s economic risk score, a subcomponent of the BICRA, remains at ‘3′.

The Spanish economy, the fourth largest in the eurozone, has been mired in recession since the end of 2008 as the global financial crisis hastened the collapse of its once-buoyant property sector. The recession sent the unemployment rate soaring to nearly 19 per cent in the fourth quarter.

The agency last December lowered its credit rating outlook on Spain to “negative” from “stable,” warning that the country faced a “prolonged” period of sluggish economic growth.

Last month, it warned that Spain could fail to meet its target of cutting the public deficit to within the EU limit by 2013 due to its “weak economic growth prospects.”

Spain’s problems have also triggered concerns that it could follow in the shaky footsteps of Greece, whose budget crisis prompted the European Union to place it under unprecedented scrutiny.