Credit rating agency Moody's Investor Service downgraded Spain's government bond rating three notches down to Baa3 from A3 on Wednesday.
Moody's attributed the downgrade to the further rise in the country's debt due to the recently approved EU aid for Spanish banks. According to the agency, Spain has very limited access to the international debt market and its economy is showing continued weakness and is vulnerable to sudden stop in funding.
"The Spanish economy's continued weakness makes the government's weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years," Moody's said in a statement.
On 9 June, Eurogroup, a body of the finance ministers from the eurozone countries agreed to lend Spain up to €100bn ($125bn, £80bn) to save its troubled banking sector.
Moody's indicated further downgrade, after a review of Spain's economy for three months which would depend on the outcome of the ongoing banking audits, the conditions of the EFSF/ESM loan agreement and the nature of the execution strategy for the recapitalisation of the banking system.
Other euro area developments such as the outcome of the Greek election and the end-June European Summit would also be taken into account, said Moody's.
Moody's also downgraded Spain's Fondo de Reestructuración Ordenada Bancaria (FROB) to Baa3 from A3 with possible further downgrades. FROB's short-term rating was lowered to P-3 from P-2.
With the latest rating, Moody's put Spain's rating one notch above junk status. Moody's also lowered Cyprus's government bond rating to Ba3 from Ba1, citing "material increase in the likelihood of a Greek exit from the euro area and the resulting increase in the likely amount of government support to Cypriot banks".
Germany, Luxembourg, Finland and the Netherlands are the remaining four nations in the euro area who still carry the AAA rating from the three credit rating agencies.
Asian Stocks Fall on Spain Downgrade
Major Asian indices fell in morning trade, a third consecutive drop in five days, triggered by the Spain downgrade and concerns about the slow growth in the global economy.
The MSCI Asia Pacific Index (MXAP) fell 0.3 percent to 113.10 as of 12:55 p.m. in Tokyo, with nearly five shares falling for every four that rose, reported Bloomberg.
Japan's Nikkei 225 Stock Average (NKY) lost 0.2 percent, Australia's S&P/ASX 200 Index dropped 0.5 percent, Hong Kong's Hang Seng Index slid 0.5 percent, China's Shanghai Composite Index declined 0.3 percent while South Korea's Kospi Index added 0.1 percent, said a Bloomberg report.
Though the aid to Spanish banks did not calm financial markets across the globe, US Treasury Secretary Timothy F Geithner opined that Spain's bailout is a good, concrete signal and illustration of Europe's commitment to move toward a broader banking union, according to a report from Bloomberg Business Week.
The eurozone debt crisis would be discussed at the G20 meeting to be held in Los Cabos, Mexico, from 18-19 June. Geithner would be attending the summit along with Barack Obama.