Ratings agency Fitch downgraded Spain’s debt Friday due to Spain’s austerity measures which are seen as a threat to the country’s economic growth.

“The downgrade reflects Fitch’s assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term,” said Brian Coulton, Fitch’s Head of EMEA Sovereign Ratings.

Private debt includes household debt, company debt as well as bank debts.

The ratings agency slashed Spain’s triple A rating to AA+

Fitch warned in a statement that “the inflexibility of the labour market and the restructuring of regional and local savings banks will … hinder the pace of adjustment, particularly in the aftermath of the real estate boom.

Spain Building Boom Collapse

“Consequently, and despite a strong commitment to reducing the budget deficit … government debt will likely reach 78 percent of GDP by 2013 compared to under 40 percent prior to the onset of the global financial crisis in 2007 and the subsequent recession.”

Fitch said it believes the economic recovery “will be more muted than that forecast by the government.”

The Dow Jones Industrial Average is now down 1%, or 97 points to 10,162 and the S&P 500 is off 10 points to 1,093. The downgrade also pushed the euro lower, t0 $1.2270 from $1.2362.

The ratings outlook is stable, on Fitch’s expectations that the country’s credit profile will remain strong.

Spain is suffering from a collapsed housing market and currently holds an unemployment rate of 20 per cent.

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