Telefonica’s long-term debt rating was lowered one level to Baa2, the second-lowest investment grade, Moody’s said in a statement Wednesday. Spain’s economy will continue to hurt customer spending and Telefonica’s high dividend policy constrains free cash flow, it said. Standard & Poor’s cut Telefonica’s rating last month to BBB, the equivalent of the Moody’s grade.

“The downgrade could mean more dividend cuts than currently anticipated and an acceleration of asset sales reaching out to other parts of its portfolio,” said Henri Alexaline, a fixed-income investor who helps manage $1 billion at London-based FM Capital Partners Ltd.

After spending $85 billion on acquisitions since taking over in 2000, Telefonica Chief Executive Officer Cesar Alierta is now under pressure to reduce more than 57 billion euros ($72 billion) in net debt. Since Standard & Poor’s cut the company’s rating, Madrid-based Telefonica has announced plans to reduce the cash portion of its dividend and explore initial public offerings for its German and Latin American assets.

Spanish Risk

The cost of insuring Telefonica bonds using credit-default swaps rose to near its June 18 record high today. It increased 5 basis points, or 1.1 percent, to 507 basis points, according to Bloomberg prices. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

“We are particularly concerned about the weakness in Telefonica’s financial ratios and do not expect it to meet the financial-ratio guidance set for the previous rating level over the short to medium term,” Carlos Winzer, a Moody’s analyst in Madrid, said in the statement. “The weakening of the Spanish government’s creditworthiness creates a risk of contagion for issuers domiciled in or materially exposed to Spain.”

A company official declined to comment on the downgrade when contacted by Bloomberg News.

The phone operator is accelerating the sale of assets as it plans to reach a net debt ratio of less than 2.35 times operating income before depreciation and amortization in 2012, from 2.46 last year.

Telefonica said June 10 it is selling half of its stake in China Unicom (Hong Kong) Ltd. for HK$11 billion ($1.4 billion) to cut debt. It’s also seeking to raise about 1 billion euros from a sale of its call-center unit Atento Inversiones & Teleservicios SAU, people familiar with the matter said earlier this month.

Telefonica shares fell 0.5 percent, reversing earlier gains, to 9.82 euros at 1:11 p.m. in Madrid trading.