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Spain downgraded by upstart credit rater

May 30, 2012: 11:01 AM ET

In case you missed the many red flags flying over Spain, Egan-Jones is here to let you know that the nation has some problems.

Egan-Jones cut its credit rating on Spain Tuesday, saying the cost of the nation's banking crisis will "inevitably" fall on the government.

One of the smallest players in business, Egan-Jones says its calls are a big deal because similar moves from Standard & Poor's and Moody's often follow. But the company has recently come under fire from U.S. securities regulators for allegedly exaggerating its expertise in official filings.

Nevertheless, the downgrade from BB(-) to B does not bode well for Spain.

Spain is struggling with growing deficits and a shrinking economy. The government had a deficit of 9.6% in the first quarter, while gross domestic product is expected to shrink 1.7% this year. Add to that an unemployment rate of 24.4% -- the highest in the eurozone.

Against this bleak economic backdrop, Spain is seeking to clean up its banking sector, which is facing massive loses stemming from the collapse of the nation's housing bubble.

Last Friday, the government announced a 19 billion euro bailout for Bankia, one of the nation's largest banks. But policy makers in Madrid failed to consult with the European Central Bank, which is apparently not pleased with the plan to use Spanish government bonds as collateral for loans.

In any event, Bankia could just be the beginning of a much larger and more expensive bailout of the Spanish banking system. The assets of Spain's largest two banks alone exceed the nation's GDP, according to Egan-Jones.

"Spain will inevitably be faced with payments to support a portion its banking sector and for its weaker provinces," said Egan-Jones.

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Ben Rooney
Ben Rooney
Staff writer, CNNMoney

Ben Rooney is a staff writer for CNNMoney. He covers the European debt crisis and other international finance stories, in addition to writing about stocks, bonds, investing and other Wall Street-related news. Follow Ben on Twitter: @ben_rooney

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