Ratings agency Moody’s has downgraded several Spanish covered bonds and confirmed that the ratings carry a negative outlook.

The government bonds have been downgraded two notches to A1 from Aa2 as Moody’s warned that the country’s sovereign rating was susceptible to ‘contagion from further shocks and the domestic fragilities’.

Banco Santander’s long term debt and deposit ratings were downgraded, along with other Spanish banks, including Dexia Sabadell, Banca Civica and Catalunya Banc.

The ratings agency said that since placing the ratings under review in late July this year, the European sovereign debt crisis had not been resolved.

‘Spain’s large sovereign borrowing needs as well as the high external indebtedness of the Spanish banking and corporate sectors render it vulnerable to further funding stress,’ Moody’s said.

The agency expects Spain’s GDP growth to reach 1 per cent in 2012 ‘at best’, down from its earlier forecast of 1.8 per cent.

Moody’s warned, ‘Lower economic growth in turn will make the achievement of the ambitious fiscal targets even more challenging for Spain.’

It is the latest country to be downgraded by Moody’s following its recent rating actions on the sovereign ratings of Italy and Belgium, which had its ratings placed under review for possible downgrade.

Despite the downward rating of the country’ bonds, it has been reported that in bond auctions this morning, Spain managed to sell €3.91 billion (£3.4 billion) of government bonds.