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Late yesterday, S&P surprised investors by declaring a two-step downgrade of Spain's sovereign rating to BBB-. This is the lowest investment grade rating. It is matching Moody's current assessment, but it has indicated it will complete its current review this month.

Because S&P is playing catch-up rather than leading Spain's sovereign rating, it may not be materially important. However, the timing was surprising. This week, eurozone finance ministers issued supportive comments about Spain. Many observers have been talking and writing as if Spain was turning back the financial crisis. We remain skeptical.

The ink on Spain's 2013 budget is hardly dry and it already lacks the credibility on the grounds that it assumes what nearly everyone else regards as an unrealistically optimistic forecast that the economy only contracts by 0.5% next year. S&P noted the downside risks to growth.

The sovereign downgrade will likely have knock on effects on banks and the region's rating, and this may be indicated in the coming days. S&P maintained a negative outlook and pointed to the friction between the central and local governments caused by the austerity and rising unemployment. Yet, S&P insists that it will cut the ratings again if support for the current reform agenda wanes.

The S&P move is likely to be seen in Europe, and especially Spain, as a slap in the face. Spain has recently announced more structural reforms, the ESM is operationalized, the ECB's OMT is in place. The euro fell to support ahead of $1.2800, but rebounded smartly. Immediate resistance is seen in the $1.2920-30 area. Spanish bonds are little changed, while the equity market is underperforming, led by oil and gas and telecoms.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: S&P Disses Spain