Standard & Poor’s has cut Spain’s credit rating and warned of risks to come.
S&P cut Spain two notches to BBB+, warning that the country could have to take on more debt to support its banking sector.
The ratings agency has also placed Spain on negative outlook, meaning there is a risk of further downgrades to come.
S&P predicts the Spanish economy will shrink by 1.5% this year, having previously forecast 0.3% growth.
In 2013 it expects the economy to contract 0.5%, having previously predicted 1% growth.
S&P also gave a damning assessment of the situation in the rest of Europe, saying: “In our view, the strategy to manage the European sovereign debt crisis continues to lack effectiveness.
“We think credit conditions, and hence the economic outlook for Spain, could now deteriorate further than we anticipated earlier this year unless offsetting eurozone policy measures are implemented to support investor confidence and stabilize capital flows with the rest of the world.”
The agency suggested such measures could include a pooling of resources and obligations between eurozone countries and policies to harmonize wages across the currency bloc.
But there were some positive comments about the measures taken by the government.
“Despite the unfavorable economic conditions, we believe that the new government has been front-loading and implementing a comprehensive set of structural reforms, which should support economic growth over the longer term,” S&P said.
“In particular, authorities have implemented a comprehensive reform of the Spanish labor market, which we believe could significantly reduce many of the existing structural rigidities and improve the flexibility in wage setting.”
But S&P concludes that the labor market reforms will not create employment in the near term and predicts that “the already high unemployment rate, especially among the young, will likely worsen until a sustainable recovery sets in”.
Spain has Europe’s highest rate of unemployment at 23%, with more than half of young people out of work.