Standard and Poor's cut Spain's credit rating on Friday, sending the euro lower and underlining the challenges facing Europe's big powers as they prepare to meet G20 counterparts over the euro-zone debt crisis.
The rating agency, whose move mirrored last week's downgrade of Spain by Fitch, cited Spain's high unemployment, tightening credit and high private-sector debt among reasons for cutting the nation's long-term rating to AA- from AA.
S&P announced the downgrade as finance ministers and central bank chiefs from the world's 20 biggest economies were due to meet later on Friday in Paris to find an urgent and convincing solution to the deepening debt crisis.
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.
It also noted the incomplete state of labor market reform and the likelihood of further asset deterioration for Spain's banks, and it downgraded its forecast for Spanish economic growth in 2012 to about 1 percent.
In February, S&P had forecast 1.5 percent growth for 2012.
Like Fitch, which also now rates Spain at AA-, S&P signaled further possible downgrades for Spain, saying there was still a risk the euro zone's fourth-largest economy could slip into recession next year, with a 0.5 percent contraction.
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 labor market and other growth-enhancing reforms are delayed, S&P said.
The euro dipped in Asian trade after the downgrade, though it still remained on track for its biggest weekly rally since January. It last traded at $1.3753, having shed around a third of cent.
Finance chiefs from outside the euro zone are expected to speak frankly when they meet their European counterparts at Friday's G20 meeting, given impatience growing over the crisis and its implications for the rest of the world.
Canadian Finance Minister Jim Flaherty set the tone late on Thursday, telling reporters before leaving Ottawa that euro zone actions were short of what was needed.
On Thursday, Fitch cut credit ratings or signaled possible downgrades for several major European banks. It downgraded UBS
(Reporting by Balazs Koranyi and Mark Bendeich)