Moody’s downgrades 16 Spanish banks

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

Spain’s banks, awash in bad loans after a real estate boom went bust, are at the heart of the eurozone debt crisis because markets fear a state bailout would put a severe strain on the country’s already stretched public finances.

Spain relapsed into an economic recession in the first quarter and likely faces a prolonged slump as the government tries to shrink its budget deficit by slashing spending.

“Amidst the ongoing euro area debt crisis, the Spanish government’s rising budget deficit and the renewed recession, sovereign creditworthiness has declined,” the ratings agency said. “This decline is a driver of today’s bank rating actions.”

Moody’s had cut Spain’s sovereign rating by two notches to A3 in February, placing it in the middle of its investment grade rating scale. It maintains a negative outlook on the credit.

Thursday’s move came after Moody’s downgraded 26 Italian banks on Monday and followed a press report about a run at troubled lender Bankia, Spain’s fourth largest bank. The Spanish government, which took over Bankia last week, denied the report.

Santander suffered a three-notch cut to its long-term rating to A3 from Aa3.

Moody’s also cut BBVA’s long-term rating by three notches to A3 from Aa3 and put the credit on a negative outlook. BBVA is Spain’s second largest lender.