Josh Marshall sums things up:
So in a nutshell: McCain is going senile, McCain is even more clueless about diplomacy than George W. Bush, or McCain doesn't have the ability to admit a mistake and back down from a ridiculous position. And foreign policy is supposed to be his strong suit?
Okay, a moment to take stock on the embarrassing McCain gaffe. As noted earlier, despite the fact that McCain repeatedly suggests that Spain is a country in Latin America, McCain's foreign policy advisor Randy Scheunemann, insists that McCain wasn't confused, knew exactly who Zapatero was and meant every word of what he said. So with the McCain campaign sticking to its guns, let's review the possibilities of what happened here.
Option #1: McCain is so addled he not only doesn't know who Zapatero is but doesn't even know where Spain is located.
Option #2: McCain was not confused but actually meant his very belligerent comments about Spain and the Zapatero government (Scheunemann's line).
Option #3: Through some mixture of confusion and inability to understand the interviewer's accent, McCain was confused about who he was talking about and decided to wing it, assuming that the person he was being asked about was some other left-wing strong man from Latin America and answering with the standard boilerplate about standing up to America's enemies.
No matter how you slice it, the man has no business being in the Oval Office.