By Win ThinS&P reduced Spain's credit rating one notch to AA from AA+ Wednesday and kept a negative outlook. This comes after it slashed Greece and Portugal Tuesday by three and two notches, respectively, so Spain got off relatively easy. However, Spain remains way out of line with our own model, which puts Spain at A/A2/A vs. actual ratings of AA/Aaa/AAA. Believe it or not, Moody's and Fitch still have Spain as a triple-A credit. We don't think that can last, and we see multiple downgrades ahead for Spain. When those other two move into double-A range, they will likely cause even bigger ripples than today's S&P move. Indeed, Spain is the 800-pound gorilla in the room. Greece and Portugal are small countries, but Spain is about five times their size with regards to GDP. Recent ratings action underscores the fact that the agencies are on the warpath and unlikely to relent anytime soon. And given that most of the peripheral countries remain overrated, the downgrade story will remain in play for most of 2010. We saw this during the Asian crisis, when the agencies got caught wrong-footed and then slashed ratings with abandon across the entire region just as the situation was deteriorating further, adding more fuel to the fire. As we wrote yesterday, "To be clear, our model has been highlighting significant downgrade risk for Portugal, Ireland, Greece, and Spain since June 2009. The problems facing these peripheral countries are nothing new, and these problems are also not likely to be solved over the near-term. As such, we expect continued pressure on the bonds of the periphery, which likely will continue to weigh on the euro as well." The euro is testing support around 1.3140, where the market has twice been turned back already today. Many in the market are puzzled by the euro's resiliency in the face of all this negative news. The one thing we would point out is that most likely everyone and their grandmother are short euros. Market positioning is very one-sided, and so in fact we would be cautious of a potential pop in the euro from a positive Greece headline. Those short euros need to keep very tight stops, but we would use any rallies to go short euros again.