Standard and Poor’s, the ratings agency, downgraded its credit rating for Spain yesterday.

The move followed a similar downgrade for Greece last week.

Standard and Poor’s has also warned Portugal and Ireland that their ratings are under review.

A statement from the ratings agency said: “Public finances will suffer in tandem with the expected decline in Spain’s growth prospects, and that the policy response may be insufficient to effectively counter the related economic and fiscal challenges.”

It goes to show that while many fear that the poor state of the British economy could push sterling to its knees, the Eurozone is by no means invulnerable.

Mind you, rumours are now circulating that the UK could be next.

Markets are now pricing the risk on UK government bonds higher than the risk on certain large corporate debts such as BP and Universe. Some are even suggesting the UK could be the next to suffer a ratings downgrade.

Inevitably, talk has begun circulating among the government’s more vociferous critics that the IMF will ultimately be called in.

Actually, the final outcome does depend.

The Bank of England has to tread a delicate path. If it allows the differential between UK and Eurozone interest rates to grow by too much, sterling is more likely to crash, then the cost of government debt may well rise.

The UK is more reliant than most governments on overseas debt.

The real danger is that if investors do lose faith in the UK, then the Bank of England may have no choice but to up interest rates.

© Investment & Business News 2013