Palma de Majorca.—The downgrade, to A-minus from A-plus, leaves the rating six steps below the coveted triple A designation. S&P earlier this week placed Spain's long-term double-A minus rating, three steps down from AAA, on watch for downgrade as part of the firm's broad revision of its stance on 15 of the 17 euro-zone countries.

The firm said yesterday it believed the liquidity position of the Balearics has worsened in the last year amid budgetary deviations and a reduction in credit lines.

S&P expects the region to address its liquidity situation early next year in the retail bond market. The watch for a potential downgrade reflects the firm's view that the Balearics could encounter greater difficulties in securing external funding currently anticipated.

S&P said it aims to resolve the watch within the next three months, within which time the Balearic government should have met the deficit reduction targets set by the outgoing Socialist government.

The rate cut has sparked local fears that the cost of borrowing from the banks is going to rise sharply, but yesterday, the Balearic government played down the importance of the downgrade and denied that it would have any negative effects on the region's economic recovery.

Government spokesperson, Rafael Bosch, said that he sincerely doubts that the downgrade will have a negative effect on the loans it has recently secured from the banks because the financial institutions are well aware of all the measures of control which can be adapted.

Last month, the government secured a vital 100 million euro loan from the Banco Santander and it is locked in talks for further funding with an assortment of local banks and financial institutions in order to begin paying off the huge debt left behind by the former Socialist government.

Bosch said yesterday that he doubts the downgrade will derail the government's financial plan because “we have a very tight grip on the budget and our finances but we're not going to break the bank to clear our deficit, we want to do it properly,” he added.

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