(Changes dateline to Chicago from New York, adds details of S&P downgrade, background on Moody's downgrade, Illinois Supreme Court ruling)
CHICAGO, May 14 (Reuters) - Chicago's credit rating suffered a new blow on Thursday when Standard & Poor's Ratings Services dropped it two notches to A-minus and warned it could fall even further.
S&P's downgrade came just two days after Moody's Investors Service dropped Chicago's general obligation rating into the junk level in the wake of an Illinois Supreme Court ruling last week that may limit the city's ability to rein in its $20 billion unfunded pension liability.
The junk rating with Moody's also triggered $2.2 billion in accelerated principal payments and interest-rate swap termination fees Chicago may have to make to banks, threatening the city's cash flow.
S&P said it expects Chicago to address those liquidity pressures by renegotiating terms with banks or other measures. "If the city does need to access its own internal liquidity at levels we feel compromise its overall liquidity strength this could lead to further downgrades," S&P said in a statement.
The state supreme court last Friday ruled a 2013 law that cut public pension benefits for state workers and educators violated the Illinois Constitution, potentially imperiling a separate 2014 law that boosted funding and reduced benefits for two of Chicago's four retirement systems. City unions and retirees are currently fighting the 2014 law in Cook County Circuit Court. (Reporting by Megan Davies and Karen Pierog; Editing by Chris Reese, Bernard Orr)