Fitch Ratings downgraded the credit rating of eight deficit-laden Spanish regions, including Madrid, today as a recession bites and they struggle to access long-term financing.
Spain's regions, which fund education and health, are pivotal to its efforts to slash annual public deficits and rein in mushrooming sovereign debt.
"The rating actions reflect the negative economic and market environment in Spain, which has resulted in depressed fiscal revenues," Fitch said.
It cited, too, "structural fiscal deficits of the regional administrations, which will require considerable additional efforts to be reduced, and also the difficulties in accessing long-term funding."
Downgraded regions were Madrid, Catalonia, Andalusia, Asturias, the Basque Country, Canary Islands, Cantabria and Murcia.
Among the hardest hit, the northeastern Catalonia region's long-term credit rating was slashed by two notches and left on BBB-, one notch above junk-bond status. All were left with a negative outlook in view of the Spanish economy's troubles.
The regions are blamed for much of Spain's deficit slippage last year, when the country missed its target of keeping the deficit to 6% of economic output and instead let it slide to 8.9%.
As the central government battles to slash the shortfall to 5.3% of output this year, and 3% in 2013, it is stepping up pressure on the regions to fall in line. The government has ordered them to cut their deficits - the shortfall of revenue to spending - from 2.94% of gross domestic product to 1.5% in 2012.
Spanish municipalities and regional governments have built up heavy debt loads following the collapse of a property bubble in 2008 that fueled growth for over a decade.
"Regions still face significant financing pressure in 2012 as a large proportion of debt falls due in the second half of the year," Fitch said in its report.
"Fitch understands that central government is actively seeking ways of easing liquidity for the regions and also looking at setting up instruments to facilitate long-term funding at more affordable rates,'' it added.
The downgrade of the Madrid region was partly because of a significant increase in debt in the 2010-12 period, which Fitch considered "very unlikely to be reduced".
Madrid's long-term rating was cut to A- from A; Catalonia to BBB- from BBB-+; Andalusia to BBB from A; Asturias to BBB+ from A; the Basque Country to A+ from AA; the Canary Islands to BBB from A; Cantabria to BBB+ from A; and Murcia to BBB from A.
A ninth region, Castile-La Mancha, had its rating affirmed at BBB-.