How could they have had an AAA rating in the first place?

May 28 (Bloomberg) -- Spain lost its AAA credit grade at Fitch Ratings as it struggles to cut debt amid a fiscal crisis that prompted the European Union to forge an almost $1 trillion bailout package for the region’s weakest economies.

The ratings company cut the grade one step to AA+ and assigned it a “stable” outlook, according to a statement from London today. Spain has held the top rating at Fitch since 2003. Standard & Poor’s lowered Spain’s ratings to AA on April 28.

U.S. stocks extended losses after Fitch’s announcement, with the Standard & Poor’s 500 Index sliding 1.3 percent to 1,089.21 at 12:39 p.m. in New York. The euro weakened 0.5 percent to $1.2303.

“The process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium- term,” Brian Coulton, Fitch’s head of Europe, Middle East and Africa sovereign ratings in London, said in the statement.

Spain’s parliament yesterday approved the country’s deepest budget cuts in 30 years by a single vote, casting doubt on the future of the government as Prime Minister Jose Luis Rodriguez Zapatero seeks to garner support for his 2011 budget. Spain has the third-largest budget deficit in the euro region.

“The Spanish government had been in denial from 2008 to early 2010 about the magnitude of the crisis so now you have consequences,” said Raphael Gallardo, who helps manage 500 billion euros ($615 billion) as chief economist at Axa Investment Managers in Paris. “Now with the acceleration of austerity measures, like the shocking cut to civil servant wages, they finally got real and measured the severity of the crisis.”

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

Later

Last Updated: May 28, 2010 13:13 EDT