International ratings agency Standard & Poor's (S&P) has lowered Spain's long-term sovereign credit rating two levels, from BBB+ to BBB- and its short-term rating by one level, from A-3 to A-2, the agency said late on Wednesday.
The forecast for Spain's long-term rating is negative, meaning a further fall is likely. The downgrade leaves Spain's rating at just above junk status, increasing the likelihood of Madrid being forced into a full-fledged bailout from the European Union, despite already having implemented swingeing austerity measures this year.
"The downgrade reflects our view of mounting risks to Spain's public finances, due to rising economic and political pressures," S&P said in a statement.
"In our view, the capacity of Spain's political institutions (both domestic and multilateral) to deal with the severe challenges posed by the current economic and financial crisis is declining, and therefore, in accordance with our rating methodology...we have lowered the rating by two notches."
Spain officially requested a 100 billion euro recapitalization of its banking sector on June 25. At the end of September the initial results of an official audit revealed a 60 billion hole in the banking system.
Spain plans 27.3 billion euro worth of budget cuts this year, by freezing salaries for state employees, and cutting ministerial budgets by 17 percent. The government hopes to slash the budget deficit from 8.5 percent of GDP in 2011 to just 5.3 percent this year.
S&P has previously reviewed its forecast for the Spanish economy, and now expects it to shrink by 1.6 percent next year, below the previously expected 0.6 percent drop.