Madrid - Ratings agency Moody's cut Spain's sovereign debt rating one notch on Thursday and warned of further cuts due to fears that bank restructuring will likely cost more than twice what the government expects.
"(Moody's) believes there is a meaningful risk that the eventual cost of the recapitalisation effort could considerably exceed the government's current projections," it said.
Moody's still rates Spain - one of the countries now in the firing line in Europe's debt crisis - as a high grade investment proposition.
By way of comparison, the agency rates Portugal two notches lower and Greece far down with junk status.
The ratings agency said the overall cost of recapitalising struggling banks was likely to be nearer to €40bn, double the government's estimate.
In a more stressed scenario recapitalisation needs could even rise to around €110bn to €120bn, it said.
The cut in the rating - to Aa2 from Aa1 - drove the euro to session lows against the dollar. The premium investors charge for Spanish 10-year debt instead of German Bunds widened 9 basis points on the day to 232 bps.
"This is clearly negative. I'm not sure up to what point, but it will certainly impact the banks. Obviously the direct consequence is that it will be harder and more expensive (for banks) to access financing," said Juan Rodriguez Rey, an analyst at Banco Sabadell.
Moody's also noted that nine of the country's 17 autonomous regions breached budget deficit targets.
"This casts doubts over the ability of the central government to exercise sufficient control over the regions to ensure compliance with deficit targets," it said.