Spain's sovereign debt is at risk of falling into junk bond status, according to rating agency Fitch.
NEW YORK (CNNMoney) -- Spain's sovereign debt rating was slashed three steps Thursday by credit rating agency Fitch, which warned that the nation is at risk of being downgraded into junk bond status.
The nation's debt rating was cut from "A" all the way to "BBB," the lowest rating that is considered investment grade. And the new rating was given a negative outlook, meaning it at risk for further downgrades.
Fitch pointed to the estimated cost of a Spanish bank bailout, which it said is likely to cost between €60 billion to €100 billion, as well as a prolonged recession that Fitch now expects to run throughout 2013.
"Spain's high level of foreign indebtedness has rendered it especially vulnerable to contagion from the ongoing crisis in Greece," the agency said in the note. "The much reduced financing flexibility of the Spanish government is constraining its ability to intervene decisively in the restructuring of the banking sector and has increased the likelihood of external financial support."
The firm said that part of the reason for the downgrade was "policy missteps at the European level that in Fitch's opinion have aggravated the economic and financial challenges facing Spain.
"The absence of a credible vision of a reformed [eurozone] and financial 'firewall' has rendered Spain and other so-called peripheral nations vulnerable to capital flight and undercut their access to affordable fiscal funding," said the report.
Fitch said Spain is helped by a relatively high value-added and diverse economy, one that is competitive enough that it might have a trade surplus this year.
But Spain fell into recession in the first quarter of this year. The bursting of a housing bubble slashed property values and sparked Spain's record high unemployment of 24.3% in April, the highest in the 27-nation European Union.
Problems with Spain's banking system and its sovereign debt have become a major concern for investors and economists in recent weeks.
While there are still uncertainties about whether Greece will be forced to drop the euro following its upcoming parliamentary elections on June 17, the possibility of Spain needing help is a more pressing concern due to the size of the economy, the fourth largest in the eurozone.
The fear is that Spain will need to be bailed out by other European countries if it cannot come up with a way to recapitalize the banking sector. But it remains to be seen if Germany will back a plan to allow bailout funds to be pumped directly to banks.
On Tuesday, Treasury Minister Cristobal Montoro told Spanish radio station Onda Cero that "the risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt."
He called for more help from other European governments to help support Spanish banks, saying the country couldn't solve its sovereign debt problems on its own.
But an Spain found strong demand for its debt in a successful bond auction Thursday.
The yield on Spain's benchmark 10-year bond was down 0.19 percentage point to 6.08% in trading Thursday, even after the downgrade, suggesting that investors had already priced in the risk of downgrades before Fitch's announcement.
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