Moody's Downgrades 16 Spanish Banks
General view shows a meeting of Spain's Treasury Minister Cristobal Montoro with heads of finance of all 17 regions of Spain to review their budget plans at the Economy Ministry in Madrid May 17, 2012. Spain's borrowing costs shot up at a bond auction on Thursday, after economic data confirmed the country is back in recession and reports of an outflow of deposits from nationalised Bankia hammered its share price.

Credit rating agency Moody's has downgraded 16 Spanish banks including two of Spain's biggest lenders, the Banco Santander and Banco Bilbao Vizcaya Argentaria (BBVA).

According to a statement from Moody's, nine banks were cut three notches and seven were kept on review of the agency for further downgrades.

According to official data, Spain is in recession recording a 0.3 percent contraction in the economy in the first quarter.

Moody's cited bad loans, recession, funding access worries, real estate crisis, high unemployment rate and lower credit worthiness of the government as the reasons for the downgrade.

"The Spanish economy has fallen back into recession in first-quarter 2012, and Moody's does not expect conditions to improve," the credit rating agency said in a statement.

"Banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness," it added.

The agency has also cut the ratings on Santander UK, a subsidiary of Banco Santander, the eurozone's largest lender. Santander UK maintained that the downgrade would not have any impact on its operations.

"The change to Moody's credit rating of Santander UK plc has no impact on our businesses in the UK or our plans for future growth," Andy Smith, a spokesman at Santander told the BBC.

"Santander UK plc is an autonomous subsidiary of the Santander Group, with more than 90% of its total assets held in the UK and a eurozone sovereign exposure of less than 1% of assets," he added.

There were also reports of huge deposit outflows from the partially nationalised Bankia. Following this, the bank's shares fell 14 percent on Thursday. The scrip has shed nearly 50 percent in a month.

On Thursday, Spain's three and four -year bonds were auctioned at 5.106 percent a substantial rise from the 3.374 percent when they were auctioned previously.

The 10-year debt yields rose to above 6 percent which is a hike of 15 basis points per week on average since March. If it reaches the danger mark of 7 percent, analysts fear the same fate of Portugal and Ireland to befall Spain, out of the bond market.

"Sentiment towards Spain is deteriorating with each passing day, mainly because of a loss of confidence in the Rajoy government's approach to tackling the problems in the banking sector," Reuters quoted Nicholas Spiro of Spiro Sovereign Strategy as saying.