MADRID: Spain's sickly economy faces a "crisis of huge proportions", a minister said yesterday, as unemployment hit its highest level in almost two decades and Standard and Poor's downgraded the government's debt by two notches.
Unemployment shot up to 24 per cent in the first quarter, one of the worst jobless figures in the developed world. Retail sales slumped for the 21st consecutive month as a recession cuts into consumer spending.
"The figures are terrible for everyone and terrible for the government ... Spain is in a crisis of huge proportions," Foreign Minister Jose Manuel Garcia-Margallo said in a radio interview.
Standard and Poor's cited risks of an increase in bad loans at Spanish banks and called on Europe to take action to encourage growth.
The downgrade spooked financial markets, raising the interest rate fellow euro zone struggler Italy was forced to pay to sell 10-year bonds at auction. The yield was its highest since January as investors worried about the economic outlook in the bloc's indebted states.
Analysts said the 5.95 billion euro ($7.9bn) Italian auction went well under the circumstances, but Rabobank strategist Richard McGuire said the 5.84pc 10-year yield "leaves a question mark over how long Italy will be able to finance itself at levels that can be deemed sustainable".
Italy's main banking association said the economy may contract by 1.4pc this year, more than the government's 1.2pc forecast.
Spain's country risk, as measured by the spread on yields between Spanish and German benchmark government bonds, spiked before levelling off to around 420 basis points.
Spain has slipped into its second recession in three years and fears that it cannot hit harsh deficit cutting targets this year have put it back in the centre of the debt crisis storm, pushing up its borrowing costs.
Recovery and job creation are still two years off, Economy Minister Luis de Guindos said yesterday in a news conference where he forecast 0.2pc growth in the gross domestic product next year and 1.4pc growth in 2014.
The Treasury Ministry estimated the increase of 365,900 jobless people in the first quarter meant a loss of 953 million euros in tax income.
The unemployment rate was up from 22.9pc in the last quarter of 2011 and was worse than economists had forecast. Half of Spain's youth are out of work, and figures are unlikely to improve for some time as the government slashes spending by 42bn euros this year, some 4pc of economic output.
S&P now has Spain on a BBB+ rating, which means "adequate payment capacity" and is only a few notches above a junk rating. Fitch and Moody's still rate Spain's sovereign with a "strong payment capacity".