MADRID, Spain - April 27, 2012 - Standard & Poor's cut Spain's sovereign debt rating Thursday by two notches, warning that the government's budget situation is worsening and that is likely to have to prop up its banks. S&P cut the country's rating to BBB-plus and added a negative outlook, saying it expected the Spanish economy to shrink both this year and next, raising more challenges for the government.

S&P also said that euro zone-wide polices were failing to boost confidence and stabilize capital flows, and that the region needed to find ways to directly support banks so that governments were not forced to take on those burdens themselves.

The S&P downgrade on its face is just further confirmation of what is taking place in Spain. Of itself, it has little impact on the larger picture except to make borrowing a bit more difficult.

But Spain's problems go well beyond bank borrowing. The problems in Spain are both deep and pernicious.

There are three factors involved in Spain's meltdown. First, there is the "austerity" being imposed by the right-wing Popular Party (PP) government led by Mariano Rajoy. Only 100 days into Rajoy's reign, this yielded a general strike on March 29. The government claimed only 800,000 workers took part in over 100 demonstrations nationally but according to the unions, millions marched. There was violence as well.

Second, young people are leaving Spain. With almost 50% unemployment among youngsters, the situation is easier for those who are not situated. They leave. They go to many places but especially to South America, including Argentina and Chile. It helps that with the exception of Brazil, Latin America is a Spanish-speaking continent.

Third is the increasing unhappiness of autonomous regions and cultures. Because of Spain's incredible history at the epicenter of major European movements, there are all sorts of ethnic subcultures inhabiting Spain. Spain is a kind of tribal patchwork and as the sovereign crisis rolls on, this patchwork is becoming unglued.

Catalonia, the Basque Country, Galicia and Andalusia are all self-governing and the Basques especially - but all the regional peoples - are growing increasingly restless. Madrid sucks in revenue like a black hole but not enough of it reappears.

Then there is the king. The Spanish are angry with King Juan Carlos these days, as he snuck off to Africa several weeks ago for an elephant hunt. Why the King wishes to shoot elephants is unclear but his timing was certainly bad.

The King's shooting holiday was estimated to cost 10,000 euros a day, and both Syrians and Saudis were fingered in picking up the tab. No matter who did or didn't provide the funding, the King could not have picked a worse week in which to take a vacation.

The times are unusual in Spain, between the tremendous (understated) unemployment, increased austerity measures, and expanding restlessness of autonomous regions with their clear-cut cultures. It's not clear that Spain will go the way of Greece... spinning into chaos. But the signs are not promising.

However, Spain is not Greece. Spain, along with France and Germany, is the beating heart of Europe, once (not long ago) the world's pre-eminent superpower. A Spanish bust-up would be no small thing. It would spell the end of something and the beginning of something else.