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Credit agency downgrade for Spain

The economic recovery in Europe has been dealt a blow as a key credit agency downgraded its outlook for Spain, one of the continent's major players.

The impact of restructuring its savings banks and tough austerity measures are a major risk to Spain's future and prompted Fitch Ratings to revise its outlook for the country from stable to negative.

The potential for greater stress in European financial markets if a credible response to the eurozone debt crisis is not found by EU leaders also weighs on Spain's hopes for recovery, the agency warned.

Economists have raised concerns over the threats the eurozone crisis in Europe pose to the UK economy. A weakened eurozone could hit the UK's export trade - seen as key to a healthy economic recovery.

Spain is struggling to emerge from nearly two years of recession and has the highest unemployment rate in the eurozone and a swollen budget deficit.

Spain's "relatively high" level of debt to foreign nations makes the economy more vulnerable to a "credit shock" if the broader eurozone crisis deepens, Fitch warned.

The eurozone has come under increasing scrutiny since Greece needed a 110 billion euro (£93 billion) bailout from the EU and the IMF's European Financial Stability Facility in May. Ireland followed suit in November and was forced to accept a £72.5 billion bailout.

Portugal, Spain and Italy have been tipped by many as the next potential casualties in line for financial aid.

However, Fitch affirmed its AA+ rating for the Ireland's debt in light of the government's aggressive response to the economic downturn.

Despite a relatively strong "core" banking sector dominated by Santander and BBVA, Fitch said concerns about the potential costs to the government of restructuring the savings bank sector weighed on the country's economic outlook. The agency expects the amount of extra capital required by the banking system to be 38 billion euros (£32 billion).

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