Moody's cuts Spain's credit rating to AA1

The agency cut Spain's top-ranked "AAA" rating by a single notch to "AA1", meaning the country will now have to pay more to borrow money on the international markets.

The downgrading comes as a sharp reminder of the costs if Spain fails to convince world financial markets it is determined to cut spending, reform labour markets and propel growth.

The greater fear in the markets had been a bigger, with a two-notch cut in the rating.

But Moody's said Madrid’s 2011 tight-fisted budget plans, to be presented to parliament later today, convinced it to trim its credit rating by just one notch.

Spanish unions called a general strike yesterday to protest against the very measures that Moody's is calling for: tough labour reforms and state spending cuts.

Tens of thousands also took to the streets in major cities in anger at the measures aimed at slashing a staggering 20-percent unemployment rate and reviving the economy.