Standard & Poor’s has cut its ratings on PSA Peugeot-Citroen into junk territory, suggesting that the firm’s weak profitability will be further hit by weak sales in its major markets.

S&P cut PSA’s corporate credit rating one notch to BB-plus, one step below investment grade, and gave the company a negative outlook, indicating an additional cut may be likely over the next one to two years.

A downgrade into junk territory can significantly increase a company’s borrowing costs.

Weakness in European auto demand is likely to persist in 2010, said S&P, which had previously expected a market recovery.

“We believe that the timing of the economic recovery in Europe is likely to be delayed, and that the positive effect of the various government incentives on car sales in 2009 will probably have negative consequences for 2010 sales,” S&P said in a statement.

As a result, “Peugeot’s profitability and financial profile will deteriorate significantly,” S&P said.

PSA recently booked a half-year operating loss of EUR826m on revenues down 21.8% to EUR23,497m from EUR30,066m in 2008, citing “adverse market and industry conditions”.