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Spain crisis deepens with jobless rise, downgrade
Spain economic crisis deepens as unemployment rises and S&P downgrades country's debt
By The Associated Press

MADRID (AP) ' Spain's economic problems were put in sharp relief Friday as figures showed unemployment rising to near 25 percent, a day after a credit ratings agency downgraded the country's debt rating and warned it faced an uphill battle to get a grip on its finances.

Official figures showed that unemployment has jumped to 24.4 percent in the first quarter of 2012 ' the highest rate in the 17-country eurozone ' from 22.9 percent in the fourth quarter of 2011. The data show that 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 were another blow to the conservative government after Standard & Poor's late Thursday became the first of the three leading credit rating agencies to strip Spain of an A rating. It cited a worsening 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 even 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 now just three notches above so-called junk status. Earlier this week, the Bank of Spain confirmed that the country had entered a technical recession ' tow consecutive quarters of negative growth.

The country's economic problems have become the epicenter Europe's debt crisis in recent weeks as investors worry over Spain's 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 combined economies 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 envelop Italy, the eurozone's third-largest economy, which owes around '1.9 trillion ($2.5 trillion), more than double Spain's '734 billion.

Markets in Spain initially reacted negatively to the twin news but soon recovered their poise alongside the rest of Europe as the downgrade was largely viewed as a belated acknowledgment of the market realities.

The main IBEX index, having traded over 1 percent lower earlier, was 0.3 percent higher by late morning, while the yield on the country's ten-year bond fell from an earlier high to trade at 0.10 percentage point higher at 5.89 percent.

Though the yield is below the 7 percent rate widely considered unsustainable in the long-run, it's edged up over the past month from below 5 percent 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 endemic 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."

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."


Pylas contributed from London.

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