Euro Crisis: Sixteen Spanish Banks Downgraded

Sixteen Spanish banks have been downgraded by credit rating agency Moody's, as the country's government intervened to deny reports of a run on troubled lender Bankia.

The agency said the decision to downgrade the banks - which include the eurozone's largest, Banco Santander (Amsterdam: SANT.AS - news) - was due to a weak economy and the government's reduced ability to support struggling lenders.

All the banks' long-term debt ratings were downgraded by at least one notch, and some suffered three-notch cuts.

Meanwhile, shares in Bankia - which was recently part-nationalised - plunged 27% after Spanish newspaper El Mundo reported 1bn euros (£800m) worth of deposits had been withdrawn in the last week.

In a separate development, the bank's chairman released a statement in an attempt to reassure customers their deposits were safe.

There is a wealth of pressure on the Spanish economy - largely stemming from the collapse of its property bubble four years ago - which badly damaged its financial system.

Spain's recession was confirmed by the latest estimate of GDP, which measured negative growth of 0.3% following a similar contraction in the final three months of 2011.

The biggest concern for the Spanish government is its own borrowing costs, which have been forced up by contagion from Greece.

Its (Euronext: ALITS.NX - news) 10-year debt yield hit 6.5% on Wednesday, prompting prime minister Mariano Rajoy to voice worries about the state's ability to finance itself.

He appealed for the eurozone to come together.

"It's a difficult and complicated situation," he told reporters in parliament as traders wondered whether Madrid might one day, like smaller Greece, Portugal and Ireland (Xetra: A0Q8L3 - news) , need a bailout.

He said: "The risk premium has risen a lot and that means that it is difficult to finance yourself at a reasonable price."

That was realised again on Thursday at a sale of short-term bonds, which raised its target of 2.5bn euros (£2bn) but at sharply higher yields.

Spain is in such trouble because of the perilous state of its financial sector, which many say is damaged beyond self-repair by bad loans made over 10 years to 2008 that saw house prices shoot up more than 200%.

It part-nationalised Bankia, its fourth largest bank, as part of wider efforts to rescue the sector last week.

On Wednesday, Bankia delayed releasing its first quarter results which also knocked confidence.

While many Spanish banks have crippled balance sheets, Santander - with its separate UK business - is not among them.

However, a wider lack of confidence in the Spanish financial sector has indicated that its government's intervention to date has been judged by investors to have fallen short of the mark.

The example of Greece has weighed on investors' willingness to lend to Spain and the prospect of yet more state liabilities appearing in the Spanish banking system have also hurt.

Some market analysts believe Spain - or Europe (Chicago Options: ^REURUSD - news) - will have to inject funds into the financial sector to avert a collapse.

In an attempt to boost confidence, the government has asked external auditors to analyse the banks' balance sheets and put a cost on their liabilities.

However, markets may not like what they find.

Stock markets on Thursday resumed their falls as investors shed more risk over the wider euro debt crisis.

In London, the FTSE 100 (Euronext: VFTSE.NX - news) joined other main European markets in shedding value.

It was more than 1% lower by late afternoon.