Standard & Poor's (S&P) has reduced its long-term sovereign credit rating on Spain by two notches - to BBB+ from A - expressing concern about the country's large volume of debt and shrinking economy.
"We think risks are rising to fiscal performance and flexibility, and to the sovereign debt burden, particularly in light of the increased contingent liabilities that could materialize on the government's balance sheet," the rating agency said in a statement.
S&P said it now appears Spain will take longer than originally expected to reduce its budget deficit and that the government in Madrid may have to provide more help to the country's troubled banking sector.
The agency also offered a more pessimistic forecast for economic growth in Spain, calling for gross domestic product to shrink 1.5 per cent this year and an additional 0.5 per cent in 2013.
At the same time, the rating agency expressed confidence that "the Spanish economy is rebalancing, and the measures the government has taken should facilitate this process".
S&P is less confident that Prime Minister Mariano Rajoy will be able to bring down Spain's budget deficit to 5.8 per cent of GDP this year and 3 per cent of GDP in 2013.
"In our opinion, these targets are currently unlikely to be met given the economic and financial environment. We forecast a budget deficit of 6.2 per cent of GDP in 2012 and 4.8 per cent in 2013," the agency said.