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S&P Downgrades Spain

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Spain suffered another downgrade as Standard & Poor’s cut its sovereign credit rating and its unemployment rate rose to its highest level since the early 1990s—now one of the highest in the world.

Bloomberg reported Friday that the ratings agency dropped Spain’s credit rating by two notches late Thursday, citing the risk of an increase in bad loans at Spanish banks. The country is in its second recession in three years, and retail sales fell for the 21st consecutive month.

Spain’s credit rating now stands at BBB+, a few notches above junk and on par with Italy. While Fitch and Moody’s still rate Spain as having a “strong payment capacity,” S&P only considers it an “adequate payment capacity.” S&P also said that euro zone countries needed to better manage the debt crisis.

In the report, Foreign Minister Jose Manuel Garcia-Margallo said of the country’s economic situation, “The figures are terrible for everyone and terrible for the government … Spain is in a crisis of huge proportions.”

Unemployment in Spain ticked up to 24% in Q1 from from 22.9% in Q4 of 2011. Half of the young people in Spain are without jobs, and the situation is unlikely to improve any time soon with employers cutting jobs under looser employment rules and the government imposing an additional 42 billion euros ($55.562 billion) in spending cuts this year.

On Thursday Prime Minister Mariano Rajoy said he intended to continue austerity measures despite the fact that calls are beginning to be heard in various European quarters to push for growth instead.

The bad news about Spain was contagious, as Italy went to market with bonds and ended up paying more yield on less demand. Bloomberg reported that, while the country sold 5.95 billion euros in bonds, it had to pay 5.84% on its benchmark 10-year bonds; that was up from 5.24% on March 29. Demand was also down from the last auction, at 1.48 times offerings compared with 1.65 in March.

Italy expects its own economy to shrink 1.2% in 2012, while Spain foresees a contraction of 1.7%.


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