Ratings agency Standard & Poor’s has downgraded Spain’s credit rating, highlighting a deepening recession and mounting pressure on Madrid’s finances.
S&P cut Spanish debt from BBB+ to BBB-, one level above junk status, and warned of possible further downgrades.
Spain is struggling with high debt levels and the highest rate of unemployment in the eurozone.
Madrid has introduced drastic spending cuts and tax rises, but many think it will have no option but seek a bailout.
“The downgrade reflects our view of mounting risk to Spain’s public finances, due to rising economic and political pressures,” S&P said.
“The deepening economic recession is limiting the Spanish government’s policy options.”
Last month, the government unveiled its latest budget designed to make savings of around 13 billion euros ($16.7 billion) next year, by cutting public sector wages, education, health and social services.
The cuts were the latest in a series of austerity measures that have sparked angry protests across Spain.
Despite the cuts, tax rises, labor market and pension reforms, the Spanish government has said the country’s overall debt levels will rise next year to more than 90% of total economic output.
The country’s borrowing costs have remained high for months, leading many analysts to argue it is only a matter of time before Madrid is forced to ask its eurozone partners for financial assistance.
However, last week, Spanish Economy Minister Luis de Guindos denied his country would be asking for help.
Spanish region of Catalonia has asked for a bailout of 5 billion euros ($6.3 billion) from the central government.
This summer, an 18 billion-euro public fund was set up by Madrid to aid its 17 autonomous regions, which are in deep debt.
Catalonia represents one-fifth of the Spanish economy.
It comes as official figures showed that Spain’s economy contracted further in the second quarter.
The economy shrunk by 0.4% between April and June after a 0.3% drop in the previous three months, the Instituto Nacional de Estadistica said.
Spanish region of Catalonia has asked for a bailout of 5 billion euros from the central government
The nation’s struggling economy has now declined for three straight quarters. On an annual basis, Spain’s economy contracted by 1.3% in the second quarter.
Speculation has persisted that the country will have to request a full financial rescue.
In June, Spain requested 100 billion euros ($122 billion) of loans from the eurozone’s bailout fund to help support its banks, which are struggling with bad debts from loans made in the property sector.
Despite this, the official figures show that Spain grew during 2011 as a whole despite earlier statements that it had shrunk for the year. But the economy contracted in 2010 more than had been stated.
The European Central Bank has said it will come up with ways to help eurozone countries, leading to raised hopes that it will buy Spanish debt to push down the cost of borrowing.
Prime Minister Mariano Rajoy has said he will do “what was best for the Spanish people” and is considering all options regarding a bailout, which has helped calm markets.
On Tuesday, the interest that Spain pays to borrow for three months fell to 0.946%, from 2.434% at a similar auction in July. Six-month debt dropped to 2.026%, from 3.691%, at the sale.
But the rate of interest Spain pays on longer-term borrowing has remained high because of investor concerns, making it difficult for the nation to service its debts.
Last month, Madrid announced additional spending cuts and tax rises worth 65 billion euros.
Meanwhile, the so-called troika – the International Monetary Fund, the ECB and the European Commission – are in Lisbon to monitor the progress that Portugal is making on its commitments under its bailout.
Last week, official figures indicated that the government would probably miss its target of deficit target unless it found ways to tighten the budget further.
This comes after the troika visited Greece last week.
Greece’s continued access to the bailout packages depends on a favorable report from the troika.
Athens is trying to finalize a package of 11.5 billion euros of spending cuts over the next two years to qualify for the next 33.5 billion-euro installment of its second 130 billion-euro bailout.
Spain’s decision to request a loan of up to 100 billion Euros ($125 billion) from eurozone funds to help shore up its struggling banks has won broad support.
The International Monetary Fund (IMF) said the bailout was big enough to restore credibility to Spain’s banks.
Washington welcomed the measure as a vital step towards the “financial union” of the eurozone.
The move was agreed during emergency talks between eurozone finance ministers on Saturday.
IMF managing director Christine Lagarde said the plan for Spain should provide “assurance that the financing needs of Spain’s banking system will be fully met”.
“I strongly welcome the statement by the Eurogroup, which complements the measures taken by the Spanish authorities in recent weeks to strengthen the banking system,” she said.
“The IMF stands ready, at the invitation of the Eurogroup members, to support the implementation and monitoring of this financial assistance through regular reporting.”
Spain's decision to request a loan of up to 100 billion Euros ($125 billion) from eurozone funds to help shore up its struggling banks has won broad support
US Treasury Secretary Timothy Geithner welcomed the latest moves as “important for the health of Spain’s economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area”.
France’s Finance Minister Pierre Moscovici said the deal would “contribute to restoring confidence in the eurozone”.
The president of the European Commission, Jose Manuel Barroso, said he was confident that through bank restructuring and other reforms, Spain could gradually regain the confidence of investors and create the conditions needed for sustainable growth and job creation.
Earlier, Spanish Economy Minister Luis de Guindos announced that his country would shortly make a formal request for assistance.
Luis de Guindos said the help would be for the financial system, not the economy as a whole.
“This is not a rescue,” he said.
He also said the aid would not come with new austerity measures attached to the economy. Spain has already imposed strict economic reforms in a bid to tackle its debt problems.
The loan will bolster Spain’s weakest banks, left with billions of Euros worth of bad loans following the collapse of a property boom and the recession that followed.
Some banks borrowed large amounts on the international markets to lend to developers and homebuyers, a riskier strategy than funding it with deposits from savings.
The exact amount that Spain will receive will be decided after the completion of two audits of its banks, due to be completed by the end of June.
The money will come from two funds created to help eurozone members in financial distress – the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), which enters into force next month.
Investors have recently demanded higher and higher costs to lend to Spain, making it too expensive for the country to borrow the money needed for a bank rescue from the markets.
Spanish Economy Minister Luis de Guindos has dismissed talk of it seeking a bailout from the International Monetary Fund (IMF) as “senseless”.
And the IMF denied that Spain had asked to discuss rescue loans.
The IMF has contributed to bailouts of all the other eurozone nations, such as Greece, that needed help.
Meanwhile, the European Central Bank (ECB) president Mario Draghi described the current set-up of the eurozone as “unsustainable”.
There were rumors that Spain had already gone to the IMF, after the Spanish deputy prime minister went to meet the IMF’s managing director Christine Lagarde.
Spanish Economy Minister Luis de Guindos has dismissed talk of it seeking a bailout from the IMF as senseless
“My desire is to not come out and deny these rumours because they are senseless,” Spanish Economy Minister Luis de Guindos said on Spanish television.
Spain has taken Greece’s place as the epicentre of the eurozone crisis as concerns over the health of Spanish banks have shaken markets.
Bankia, Spain’s fourth largest bank, has asked for another 19 billion Euros recently from Madrid, but many question whether Spain will be able to afford it.
Speaking to the European Parliament, Mario Draghi said: “Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no. Can the ECB fill the vacuum of the lack of action by national governments on the structural problem. The answer is no.
“The next step… is to clarify what is the vision a certain number of years from now. The sooner this is specified, the better it is.”
And EU economics commissioner Olli Rehn said more austerity was needed if the eurozone was to avoid disintegration.
Olli Rehn talked down the idea of European states issuing joint bonds, saying that austerity and closer co-operation were needed.
“We need a genuine stability culture and a much upgraded common capacity to contain common contagion,” he told a conference.
New figures also showed eurozone inflation slowed more than expected this month.
Inflation in the 17 countries that use the euro eased to 2.4% in May from 2.6% in April.
The figure is still above the ECB’s target to keep inflation below 2%, but the lower-than-expected number could fuel calls for an interest rate cut next week.
In other figures released on Thursday, Germany’s unemployment rate fell below 7% as Europe’s biggest economy continued to perform strongly.
The jobless rate dropped to 6.7% in May, from 7% in April, as the number of people unemployed fell by 108,000 to 2.86 million.
However, there was more bad news from Greece as figures showed that Greek retail sales volumes fell by 16.2% in March compared with a year earlier. This followed February’s decline of 12.9%.
Spain’s retail sales dived in April, showing the biggest fall since the figures started being collected in 2003.
Sales fell 9.8% last month compared with the same month last year, after adjusting for calendar differences, according to official figures from the National Statistics Institute.
The fall was much worse than had been expected, and marked the 22nd consecutive month of declining sales.
Sales had fallen by 3.8% in March.
Spain’s retail sales dived in April, showing the biggest fall since the figures started being collected in 2003
Without adjusting for calendar effects, retail sales fell 11.3% in April having dropped 4% in March.
It is the latest bad news from the Spanish economy, which saw the level of risk attached to its government bonds hitting record levels on Monday after it emerged on Friday that banking group Bankia was going to need a bigger bail-out than had been expected.
Spanish shoppers are being discouraged by government austerity measures, rising taxes and Europe’s highest rate of unemployment.
Employment in the retail sector was down 1.2% in April from the same month in 2011.
The unemployment rate is over 24%, while the economy is back in recession having contracted in the last three months of 2011 and the first three months of 2012.
On Tuesday, a report from the Bank of Spain predicted that the recession would continue in the second quarter of 2012.
“Available indicators for the second quarter are still scarce but they do anticipate that activity will continue contracting in this period,” the report said.