S&P downgrades Spain to triple B plus The rating agency Standard & Poor's has cut the sovereign credit rating of Spain by two notches and placed the country on a negative outlook, saying it also expected the country's economy to contract during 2012 and 2013. S&P said on Thursday that Spain's budget trajectory was likely to deteriorate against the backdrop of a deteriorating economy and that the country may need to supply further fiscal support for its banking sector. S&P lowered the country's long and short-term rating to triple B plus/A2 from A/A-1, near the lower end of investment-grade quality. "The negative outlook on the long-term rating reflects our view of the significant risks to Spain's economic growth and budgetary performance, and the impact we believe this will likely have on the sovereign's creditworthiness," said S&P in a statement. The agency said a further downgrade was possible should Spain's net general government debt rise above 80 per cent of gross domestic product between now and 2014. "We could also consider a downgrade if political support for the current reform agenda were to wane," it said. S&P also expects the Spanish economy to contract by 1.5 per cent in real terms during 2012 and by 0.5 per cent in 2013 after previously forecasting it would expand 0.3 per cent this year and grow 1 per cent the following year. Spain's Economy Ministry responded by saying the downgrade did not properly take into account reforms announced by the government to reactivate the economy. "They haven't taken into consideration the reforms put forward by the Spanish government, which will have a strong impact on [our] economic situation," Esther Barranco told Reuters. The move is likely to increase pressure on Spain's bond prices after its benchmark 10-year yield had eased from a recent high of 6.05 per cent to 5.79 per cent on Thursday. Spain's Ibex 35 index dropped 1.3 per cent, for a loss of 18 per cent so far this year, the worst performing stock market in the eurozone. "Obviously this is not a total surprise and it shows that the recent bid we have been seeing in Bunds and the weakening of Spanish bonds has been justified," said Adrian Miller, a global markets strategist at GMP in New York. He said expected further weakening in Spanish debt prices when trading opened in Asia. "Once we hit the 6.5 per cent mark, the alarm bells will go off loudly in Brussels and more rhetoric will be coming from the European Central Bank," said Mr Miller. The euro fell 0.4 per cent to $1.3180 from $1.3235 following the downgrade. On Monday a Bank of Spain monthly report showed Spain lurching into recession for the second time since 2009, with GDP falling 0.4 per cent in the first three months of 2012, adding to a 0.3 per cent contraction in the previous quarter. Spain's banking sector, burdened by bad property and construction loans following the collapse four years ago of a long homebuilding spree, has emerged as a particular concern of investors and analysts. Banks, particularly the former cajas or savings banks, have been told by EU and Spanish regulators to strengthen their capital ratios at the same time as increasing the level of their bad loan provisions - a task some of them may not be able to achieve without a European Union or state-funded bailout. On Wednesday the International Monetary Fund warned that despite a wave of forced mergers and compulsory provisions, some of Spain's savings banks still posed a threat to financial stability and they must strengthen their balance sheets.