By Ciaran Giles and Pan Pylas
Spain's unemployment has reached close to 25 per cent, a day after a credit ratings agency downgraded the country's debt rating and warned it faces an uphill battle to get a grip on its finances.
Official figures on Friday showed unemployment has spiked to 24.4 per cent in the first quarter of 2012 - the highest rate in the 17-country eurozone - from 22.9 per cent in the fourth quarter of 2011. Another 365,900 people lost their jobs in the first three months of the year, taking the total unemployed to 5.6 million.
The figures represent another blow to the conservative government after Standard & Poor's late on
Thursday became the first of the three leading credit rating agencies to strip Spain of an A rating. It cited a worsening in the budget deficit, worries over the banking system and poor economic prospects for its decision to reduce the rating by two notches from A to BBB+.
S&P warned that a further downgrade is possible as it left its outlook assessment on Spain at "negative".
Spain, the eurozone's fourth-largest economy, is just three notches above so-called junk status.
Markets in Spain reacted negatively to the twin news. The main IBEX index was down 0.8 per cent by the middle of the morning, while the yield on the country's ten-year bond spiked 0.14 percentage points to 5.93 per cent. Though the yield is below the seven per cent rate widely considered unsustainable in the long-run, it's edged up over the past month from below five per cent in a clear sign that investors are getting increasingly fidgety over Spain's economic prospects.
"Some will blame the downgrade for causing market unrest; instead it is merely a symptom of much deeper problems in the Spanish economy and banking system," said Sony Kapoor, managing director of Re-Define, an economic think-tank. "More than anything else, this is the result of the deeply flawed and self-defeating approach to the euro crisis that EU leaders have embarked on."
Spain has become the epicentre of Europe's debt crisis in recent weeks as investors worry over its ability to push through austerity and reforms at a time of recession and mass unemployment.
With the economy shrinking and the population restless, there are concerns that the government will not meet its targets and will be forced into seeking a financial rescue as Greece, Ireland and Portugal have done before.
The difference is that Spain's economy is double the size of the three countries that have already been bailed out. The other eurozone countries would struggle to muster enough money to rescue it.
Even if the eurozone finds the financial capacity to bail out Spain, economists warn the crisis could then hit Italy, the eurozone's third-largest economy, which owes around 1.9 trillion euros ($A2.43 trillion), more than double Spain's 734 billion euros.
There are even concerns that France, the second-biggest eurozone economy, could face another downgrade from S&P after the presidential elections next Sunday, in which Socialist candidate Francois Hollande is tipped to defeat President Nicolas Sarkozy.
"With a potential change of President on the agenda one might think that France could be next in the firing line," said Gary Jenkins, managing director of Swordfish Research. "It will of course depend to some degree on the policies of the next president and it may well be that a Hollande-inspired move towards common eurobond issuance may well placate the agency."