Fitch Ratings cut Spain’s long-term issuer rating three notches to BBB from A, putting it two levels above junk.
The ratings agency also set a negative outlook for the struggling country, citing worries about contagion from Greece and doubts about the Spanish government’s ability to take strong action to shore up its banks without international support, given its “high level of foreign indebtedness.”
The banking sector could require 60 billion to 100 billion euros to recapitalize -- up to 9% of gross domestic product and a significant increase from the 30 billion euros earlier expected.
Fitch forecast a recession lasting through 2013 in Spain, going back on its previous prediction that next year would bring a mild recovery.
[Updated, June 7, 2012, 10:45 a.m.: Fitch blamed “policy missteps at the European level” and the “absence of a credible vision of a reformed [Economic and Monetary Union] and financial firewall” for making Spain and other peripheral nations vulnerable.
Last month, Spanish lender Bankia asked the government for 19 billion euros in aid -- a roughly $23.8-billion boost.
But despite Spain’s soaring unemployment, Fitch said the country still deserved investment grade status because of its political and social stability, competitiveness and the government’s commitment to policy changes.
Keeping that status, however, will depend on whether the European Central Bank, the International Monetary Fund and others offer financial help, according to Fitch.]