Spain was no garden of delights prior to the S&P downgrade to just a couple of slots above "junk" bond rating. But with unemployment at a staggering 24% and half of Spain's young people unable to find work, the chances of default keep growing.
Spain's sickly economy faces a "crisis of huge proportions", a minister said on Friday, as unemployment hit its highest level in two decades and Standard and Poor's weighed in with a two-notch downgrade of the government's debt.
On Thursday Rajoy said he was determined to stick to austerity measures even though they are aggravating the economic slump and calls for growth measures are on the increase around Europe.
Spain's unemployment rate shot up to 24 percent in the first quarter, the highest level since the early 1990s and one of the worst jobless figures in the world. Retail sales slumped for the twenty-first consecutive month.
"The figures are terrible for everyone and terrible for the government ... Spain is in a crisis of huge proportions," Foreign Minister Jose Manuel Garcia-Margallo said in a radio interview.
Standard and Poor's cited risks of an increase in bad loans at Spanish banks and called on Europe to take action to encourage growth.
Bank shares dropped 3.38 percent and Spain's country risk, as measured by the spread on yields between Spanish and German benchmark government bonds, spiked by 10 basis points to 434 basis points.
Spain has slipped into its second recession in three years putting it back in the centre of the euro zone debt crisis storm.
The government has already rescued a number of banks that were too exposed to a decade-long construction boom that crashed in 2008, and investors fear vulnerable lenders will be hit by another wave of loan defaults due to the slowing economy.
With the economy shrinking, Spain has little hope of meeting tough public deficit targets this year even as the government makes tough cuts.
Conservative Prime Minister Mariano Rajoy, in office since December, has passed an austerity budget and introduced new laws to try to make the economy more competitive.
It is likely that Europe will heed the calls for "growth" from the Keynesians and spend trillions more that they don't have, thus aggravating deficits and the debt. "In for a penny, in for a trillion" appears to be the mantra being pushed to counter the enormous pain that budget cuts are causing much of Europe.
Any growth that occurs will be fleeting, since the worsening debt of countries that go the growth route will eventually come back to bite them and even more draconian cuts will be needed to get the budget in balance and begin to bring down the massive indebtedness of the Euro zone.
One government - the Netherlands - has already fallen. Others are likely to follow as the people rebel against having their cradle to grave security taken away from them. What the euro zone will look like a year or two from now is unknown, but it won't be pretty.