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Standard & Poor’s downgraded Spain’s credit rating on Thursday, saying that the country’s sovereign debt levels were too high and that its banks would need an infusion of aid as the country’s economy contracted.

.& P., in its second downgrade of the country this year, lowered Spain’s long-term rating two notches, to BBB+ from A, with a negative outlook, indicating the possibility of a further reduction. It also lowered the country’s short-term ratings.

The downgrade came with Spain emerging as a looming problem for Europe, with fears that the country will be next in line for a huge bailout, after Greece.

In January, S.& P. downgraded nine European countries, including France, Italy and Spain, while warning that as Europe’s debt crisis entered its third year, not enough measures had been taken to shore up its financial system.

S.& P. repeated that complaint Thursday. “In our view, the strategy to manage the European sovereign debt crisis continues to lack effectiveness,” it said, even as it commended Spain’s efforts at reform.

While Spain’s credit rating is still regarded as investment grade, the reduction could increase the country’s borrowing costs. Those costs have already been climbing, with yields on 10-year Spanish bonds inching into the dangerous territory above 6 percent several times this month.

S.& P. said its decision was based on deteriorating projections for the country’s deficit and the “increasing likelihood that the government will need to provide further fiscal support to the banking sector.”

Spain has been plagued by risky mortgages and the highest unemployment rate in the euro zone, nearly 25 percent. The percentage of home mortgages at risk of default is climbing, and many economists contend Spain’s biggest banks will eventually need a bailout. Spain’s government, hobbled by its own debt and budget deficit, will be unable to come to the rescue.

S.& P. also changed its forecast for the country’s growth, citing declining incomes and a move toward deleveraging.

It now expects the economy to shrink by 1.5 percent this year and by 0.5 percent in 2013, compared with previous estimates of growth of 0.3 percent in 2012 and 1 percent next year.

Last month, the prime minister, Mariano Rajoy, announced that Spain would not meet its deficit-reduction goals for 2012 and set a new, higher goal. His cabinet is expected on Friday to approve the final version of a report to the European Commission detailing the steps that the government will take to achieve its targets.

S.& P. praised the conservative government’s reforms of the labor market — which were met with a general strike at the end of March — and the financial sector, saying they “should support economic growth over the longer term.” But in the short term, it said, the unemployment rate was likely to rise.

Source: http://www.nytimes.com/2012/04/27/business/global/sp-cuts-its-rating-on-spain-citing-debt.html?_r=1&ref=global-home