Rising youth unemployment, soaring public spending, and now a downgrade by S&P: Spain is facing its toughest challenges in decades
Spain is heading toward "something exceptional" as youth unemployment and public spending soar during a historic recession, with a top ratings agency downgrading Madrid's ability to pay back debt.
US agency Standard & Poor's (S&P) reduced Spain's "AAA" credit rating to "AA+" on Monday (19 January), making it the first country to lose the company's highest classification since Japan in 2001.
The move comes amid fears over Spain's public finances as it attempts to spend its way out of recession, with the S&P downgrade set to make matters worse by increasing the cost of public borrowing.
"Current economic and financial market conditions have highlighted structural weaknesses in the Spanish economy," the agency said in a statement.
Madrid has launched a fiscal stimulus programme worth €90 billion in a bid to relieve the economic downturn. It has also guaranteed €100 billion in new bank debt atop the purchase of €50 billion in bank assets to relax the credit crunch.
Spain last week forecast its economy will contract 1.6 percent this year before a slight pick up in 2010, with unemployment to climb from 13.4 to 15.9 percent.
The figures augur the worst recession in 50 years. But European Commission estimates are even more pessimistic, saying unemployment will hit 16.1 percent this year and almost 19 percent in 2010.
As unemployment soars, government tax revenues will shrink while spending on social support will increase, with Spain's public deficit to reach 6.2 percent of GDP this year, Brussels forecasts.
Youth unemployment is a particular worry in the country, the member state with the highest rates of young jobless, already on 29.4 percent.
Spanish youth describe themselves as "mileuristas" – the Spanish for the low figure of €1,000 they earn every month – echoing militant Greek youth which calls itself "the €600 generation."
This year has already seen widespread student demonstrations across Spain over education reform but little in the way of economic protests. Local commentators and the government however worry this may change.
Finance minister Pedro Solbes described Madrid's fears in a Sunday interview with daily newspaper El Pais.
"We are living in a very unusual situation and different from everything that has happened," finance minister Pedro Solbes said in an interview with the El Pais daily this weekend.
"We are heading towards something exceptional."
Meanwhile, S&P warned that Ireland and Portugal are in danger of similar downgrades. Greece's rating was already knocked down from "A" to "A-" last week ahead of the Spanish move.