Fitch Ratings on Friday downgraded Spain's long-term sovereign credit rating from A to BBB, just one notch from junk grade because of the increasing estimated cost of fixing the country's banking system from 3 percent of GDP to as much as 9 percent, or €100 billion ($126 billion). Shortly after the downgrade the euro sank below $1.26.

The dramatic erosion of Spain's sovereign credit profile and ratings over the last year in part reflects policy missteps at the European level that in Fitch's opinion have aggravated the economic and financial challenges facing Spain as it seeks to rebalance and restructure the economy, Fitch said in a statement. Spain has been especially vulnerable to a worsening of the euro zone crisis because of the high level of net foreign indebtedness (around 90% of GDP) and fragile confidence in its capacity to implement fiscal consolidation and bank restructuring in a timely fashion.

Fitch also said Spain's recession would remain through next year, a revision from the agency's previous forecast that said Spain would have a mild recovery in 2013.The ratings agency also said the Spanish government is increasingly unable to clean up its banking crisis without external assistance.

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