Standard & Poor's (S&P) has cut the sovereign rating of Spain to BBB-, one notch above junk status, citing deepening recession and limited options before the government to stem the crisis.
The rating cut by two levels has been followed by a negative outlook indicating further downgrade in the future. The agency notes that Spain continues to struggle with mounting financial pressures, rising unemployment and social unrest.
Spain's unemployment rate currently stands at nearly 25 percent and its overall debt is expected to cross 90 percent of the nation's total economic output by 2013.
The agency has also cited the increasing tension between Spain's regional governments and the central government for the downgrade.
"In our view, the capacity of Spain's political institutions (both domestic and multilateral) to deal with the severe challenges posed by the current economic and financial crisis is declining," says S&P.
"Overall, against the backdrop of a deepening economic recession, we believe that the government's resolve will be repeatedly tested by domestic constituencies that are being adversely affected by its policies."
S&P expects the Spanish economy which is in its second recession since 2009 to contract by 1.8 percent in 2012 and another 1.4 percent in 2013. According to the International Monetary Fund forecasts, the country's economy is expected to shrink 1.3 percent in 2013 as against a 1.5 percent slowdown this year.
Spain is yet to decide on seeking an international bailout and is trying to bring down the budget deficit with a series of austerity measures. The 10-year yield on Spanish bonds closed at 5.78 percent on 10, October, the lowest since a six-month high of 7.54 percent in July.
"We view the Spanish government's hesitation to agree to a formal assistance programme ... as potentially raising the downside risks to Spain's rating," said S&P.
Spain is on the brink of junk status with the latest S&P rate cut which is in line with the ratings of other agencies such as Moody's and Fitch.
Moody's have Spain on Baa3 and is on review for possible downgrade. It has delayed its review of Spain's investment grade debt rating following Madrid's recent bank audit and budget statement and is expected to make a decision in October.
Moody's says it needs to study several relevant factors in its review of the Baa3 assessment, the last rung of the investment grade ladder, including Spain's bank capital needs, the measures taken in Prime Minister Mariano Rajoy's 2013 budget statement and the size of support mechanisms in place from Spain's European Union partners.
Fitch has a BBB rating for the country with a negative outlook.