Capital Gold Group Report: S&P Cuts Spain's Rating One Notch on Economic View

* Lower growth could make it harder to cut deficit

(Updates throughout with Fitch, Moody's, comments)

NEW YORK/MADRID, April 28 (Reuters) - Standard & Poor's on Wednesday cut its ratings on Spain by one notch to AA from AA-plus, saying a longer-than-expected period of low growth could undermine efforts to cut the budget deficit.

The outlook is negative, reflecting the possibility of another downgrade if Spain's fiscal position worsens more than S&P currently expects, the agency said in a statement.

"In our opinion, Spain is likely to have an extended period of subdued economic growth, which weakens its budgetary position," Standard & Poor's said.

"We now project that real gross domestic product (GDP) growth will average 0.7 percent annually in 2010-2016, versus our previous expectations of above 1 percent annually over this period," S&P said.

The rating action sent the euro currency sharply lower, to one-year lows against the dollar, as Spain became the third euro periphery country to receive a downgrade by Standard & Poor's this week. Greece and Portugal were downgraded on Tuesday.

Analysts have said that because Spain is a considerably larger economy than debt-riddled Greece and Portugal any worsening of its creditworthiness could create yet bigger headaches for the euro zone as it deals with Athens' crisis.

"Indeed, Spain is the 800 pound gorilla in the room. Greece and Portugal are small countries, but Spain is about five times their size with regards to GDP," said Win Thin, Senior Currency Strategist, at Brown Brothers Harriman in New York.

"It doesn't surprise me," said Jamie Danhauser, an analyst at Lombard Street Research. "I think Spain has got off very lightly in terms of how the market has been perceiving it going forward. I think the Spanish banking sector is a lot more unstable than is often appreciated once you don't look at Santander (SAN.MC) and BBVA (BBVA.MC)."

BOND SPREADS

In fact, ahead of the rating action by S&P on Wednesday, Spanish bond spreads over German bunds hit their highest levels since the euro was launched, rising to as much as 136 basis points, up from 109 basis points on Tuesday.

Spain's markets rushed lower after the downgrade news, with the IBEX .IBEX stock index closing 3 percent lower and Santander (SAN.MC), Spain's largest bank, slumping 4.18 percent.

"At this point it is going to be very important to see what happens today, tomorrow, in the very short term with the response that the European Union (EU) and the International Monetary Fund (IMF) put together to arrest the Greece situation," said Martin Schwerdfeger, economist at Toronto-Dominion Bank in Toronto.

Standard & Poor's has now downgraded Spain twice since the global economic crisis started. The other two, Moody's and Fitch, maintain Spain on their top ratings.

However, Javier Cantavella Nadal of S&P said the downgrade in no way put in question Spain's ability to meet its debt obligations.

"Spain's ability to meets its obligations as an issuer is very strong and has not changed," Cantavella Nadal said in a conference call.

Fitch sovereign analyst Brian Coulton told Reuters that his agency rates Spain AAA with a stable outlook, saying the fiscal adjustment program put in place by the government is strong.

Spain's Socialist government has promised to cut its budget deficit from 11.2 percent of GDP in 2009 to the EU limit of 3 percent by 2013 with measures including a hike in value added tax and a freeze on civil servants' pay.

Government officials said the S&P downgrade would not put in doubt plans to cut the budget deficit.

"The important thing now is to underpin measures to establish a stable medium- to long-term growth pattern, which is the basic aim, because in fact the revision does not cast doubt on our deficit consolidation programme," Economy Secretary Jose Manuel Campa told Reuters.

Moody's would not comment on its rating of Spain.

"It seems to be one (downgrade) after the other. Only a few months ago it looked like it was contained to Greece and in the last 24 hours we are seeing the contagion effect having a firm grip across Europe," said Manoj Ladwa, senior trader at ETX Capital.