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Standard & Poor's has lowered its long-term sovereign credit rating on the Kingdom of Spain to 'BBB+' from 'A'. At the same time, the ratings services agency lowered the short-term sovereign credit rating to 'A-2' from 'A-1'. The outlook on the long-term rating is negative.

"Spain's budget trajectory will likely deteriorate against a background of economic contraction in contrast with our previous projections," says S&P in a statement. "At the same time, we see an increasing likelihood that Spain's government will need to provide further fiscal support to the banking sector."

This is the second downgrade of Spain by S&P this year. The first cut was on  on Jan. 13. Since then, the yield on Spain’s 10-year bonds have risen to 5.83 percent from 5.22 percent.

S&P has lowered its forecast for GDP to contract in real terms by 1.5% in 2012 and 0.5% for 2013. The company had previously forecast real GDP growth of 0.3% in 2012 and 1% in 2013.

The negative drags on GDP include declining disposable incomes; private-sector deleveraging; implementation of the government's front-loaded fiscal consolidation plan; and the uncertain outlook for external demand in many of Spain's key trading partners.

Despite the unfavorable economic conditions, S&P believes that the new government has been front-loading and implementing a comprehensive set of
structural reforms, which should support economic growth over the longer term.

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