Britain's new Prime Minister David Cameron says British finances are in even worse shape than he realized.

According to a report released Tuesday by the Fitch Ratings agency, Britain is facing a "formidable" fiscal challenge.

Cameron says Britain needs drastic cuts to get through its "debt crisis." The ratings agency also indicated that tax hikes may be necessary.

"Achieving such a path purely on the basis of further spending cuts would imply unprecedented real declines in primary spending," Fitch said.

Cameron's new coalition government is expected to release an emergency budget on June 22.

Britain is hardly alone in its financial woes. Germany is also cutting spending, including welfare benefits and government jobs while also raising taxes.

Civil servants in Spain went on strike Tuesday to protest wage cuts that were a part of a plan to reduce the country's huge deficit.

Meanwhile, the European Union is in the process of putting together a trillion dollar bail-out fund to stop defaults in countries that use the euro.