Announcement comes on day Spain's government formally asks for help in cleaning up sector
Moody's is cutting its credit ratings on 28 Spanish banks, saying the weakening finances of Spain's government is making it more difficult for the country to support its lenders.
The agency also said the banks are vulnerable to losses from Spain's burst real estate bubble.
The announcement came on the same day that Spain's government formally asked for help from its European neighbours in cleaning up its stricken banking sector. However the request left many questions unanswered, including how much of a $125bn loan package Spain would ask for.
That uncertainty led to losses on Monday in stock markets in Europe and the US. Bond investors pushed Spain's borrowing costs higher, a sign of lagging confidence in the country's ability to support its banks.
The downgrades are a measure of Moody's view on the ability of the 28 banks to repay their debts. Moody's said the downgrades stemmed from its lowering of Spain's credit rating by three notches earlier this month.
A downgrade usually means that banks will have to pay more for their debt. Investors demand higher interest for riskier debt, which is what the downgrades represent. However, with interest rates already at rock-bottom levels, the lower ratings may not significantly affect the cost of funding for the banks.
Spain formally asked the European Union on Monday for rescue loans to help clean up its troubled banking industry. The Spanish economy, the fourth-largest of the 17 countries that use the euro, is suffering from the aftershocks of the burst property bubble, which has devastated families as well as banks. Unemployment is nearly 25%.
The financial strength of Spain's government hinges on that of the country's banks. Two-thirds of Spain's government bonds are owned by Spanish banks, pension funds and insurance companies.
Moody's said in a statement that it was encouraged by the broad measures being introduced by Spain to support its banks.
The credit ratings agency made its move four days after downgrading some of the world's biggest banks, including Bank of America, JP Morgan Chase and Goldman Sachs, reflecting concern over their exposure to the violent swings in global financial markets. Moody's also cut the ratings on seven German and three Austrian banks this month.
The series of downgrades weren't a surprise. But they come at a time of great uncertainty in the global economy. Europe's 17-nation currency union is under threat, the US economy is slowing and the economies of India, Brazil and China are cooling.
EU leaders are meeting on Thursday and Friday in Brussels for another summit aimed at reining in Europe's debt crisis. Greece is looking to renegotiate some of the budget-cutting measures it has agreed to in exchange for continued support from international lenders. The summit comes just a week after Greece's new coalition government was formed following months of political turmoil and two inconclusive elections.
Spanish government officials haven't said how much they will seek from the loan package offered by the EU 9 June. Two international audits last week found that as much as $77bn could be needed. Spain wants the loans to go directly to the banks so that the government wouldn't be responsible for repayment. That idea has met with resistance, however.Steep losses stung stock markets on both sides of the Atlantic Monday. The Dow Jones industrial average dropped 138 points to close at 12,502.66, a loss of 1.1%. The broader Standard & Poor's 500 index fell by 1.6%.
Many analysts believe big banks, including those in the US, would be the first to feel the hit of a freeze-up in Europe's financial system if Spain isn't able to convince bond markets that it can rescue its hobbled banks.
The uncertainty pushed borrowing costs higher for Spain's government. Its stock market plunged 3.7%.
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