Standard & Poor's cut Spain's sovereign debt rating Thursday by two notches to BBB-plus, citing risks that the government will have to increase its debt burden to support its banks.
"We believe that the Kingdom of Spain's budget trajectory will likely deteriorate against a background of economic contraction in contrast with our previous projections," it said.
"At the same time, we see an increasing likelihood that Spain's government will need to provide further fiscal support to the banking sector," S&P said.
"As a consequence, we believe there are heightened risks that Spain's net general government debt could rise further."
S&P said it now sees the Spanish economy contracting by 1.5 percent this year, instead of its previous forecast of slight growth, and predicted that the contraction will continue in 2013 by about 0.5 percent.
It placed a negative outlook on the new rating, a warning that it sees "significant risks" that Spain's fiscal situation would further deteriorate and force another ratings cut.