MercoPress. South Atlantic News Agency

S&P downgrades Spain’s credit rating on incomplete labour market reforms

Spain has the highest unemployment in the EU

Ratings agency Standard and Poor's downgraded the long-term credit rating of Spain by one notch, knocking the Euro down by a third of US cent as it followed hard on the heels of a similar downgrade by Fitch last week.

S&P cited Spain's high unemployment, tightening credit and high level of private-sector debt among the reasons for the downgrade of the nation's creditworthiness to AA- from AA.

S&P and Fitch now rate Spain as AA- and both also have signalled further possible downgrades.

“Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain's main trading partners,” S&P said in a statement.

It also noted the “incomplete state” of labour market reform and said Spain's banking system would continue to weaken with “problematic assets” rising further.

“We could lower the ratings again if, consistent with our downside scenario, the economy contracts in 2012, Spain's fiscal position significantly deviates from the government's budgetary targets, or additional labour market and other growth-enhancing reforms are delayed,” S&P added.

Earlier, Fitch cut credit ratings or signalled possible downgrades for several major European banks. It downgraded UBS and Societe Generale on watch negative.