Moody's Investors Service on Thursday downgraded 16 Spanish banks, citing rising loan defaults, a renewed recession in Spain, restricted funding access and the reduced ability of the Spanish government to support lenders.
The rating agency's decision adds to fears about the health of the financial system in Europe and comes amid rising concerns about a potential exit of Greece from the eurozone.
Moody's said it has downgraded the long-term debt as well as deposit ratings for 16 lenders, including Spain's two largest banks Banco Santander SA (STD) and Banco Bilbao Vizcaya Argentaria SA (BBVA), by one to three notches.
The ratings agency also downgraded Santander UK PLC, a UK-based subsidiary of Banco Santander.
Moody's said, "The Spanish economy has fallen back into recession in first-quarter 2012, and Moody's does not expect conditions to improve during 2012. Moreover, the real-estate crisis that began in 2008 is ongoing, and unemployment has risen to very high levels."
In addition, Moody's noted that asset-quality has deteriorated, with non-performing loans to real-estate companies rising rapidly while other loan categories are expected to deteriorate.
Moody's also cited restricted market funding access, with the ongoing euro area debt crisis contributing to persistent investor concerns about Spanish banks and Spain's sovereign creditworthiness.
The ratings agency lowered the debt and deposit ratings for five banks by one notch, for three banks by two notches and for nine banks by three notches. The short-term ratings for 13 banks were downgraded between one and two notches, triggered by the long-term ratings changes.
Moody's said the outlook for ten of the downgraded banks are now negative, while the ratings for the remaining seven banks remain on review for further downgrade.
Santander and BBVA were both downgraded by Moody's to A3, the same as the Spanish government's rating. In addition, Banco Espanol de Credito, Unicaja Banco SA and Banco Popular Espanol were also downgraded to A3. Moody's downgraded Santander UK by one notch to A2.
Moody's had downgraded Spain's sovereign rating by two notches to A3 in February. Earlier this week, Moody's downgraded 26 Italian banks after lowering the credit ratings of Italy by a notch in mid-February.
Concerns over a deepening recession and weakness in the banking sector coupled with fears about Greece exiting the euro area triggered a sharp increase in Spain's borrowing costs at a short-term debt auction held on Thursday.
Spain is struggling to fix a crisis in its banking sector, which is now undermining hopes of a recovery in the recession-hit nation. The country has the highest unemployment rate in the 17-nation bloc.
The Spanish economy shrank 0.3 percent in the first quarter of 2012 as well as the final three months of last year, implying a technical recession. The European Commission has forecast Spain to contract 1.8 percent this year and 0.3 percent in 2013.
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