Moody's Investors Service on Monday cut its credit ratings on 28 Spanish banks, saying the weakening financial condition of Spain's government is making it more difficult for the country to support its lenders.
The banks are also vulnerable to losses from Spain's busted real estate bubble, Moody's said.
The announcement from Moody's came on the same day that Spain's government formally asked for help from its European neighbours in cleaning up its stricken banking sector.
However the request left many questions unanswered, including how much Spain would ask for out of the $125 billion loan package it has been offered.
That uncertainty led to losses on Monday in stock markets in Europe and the US.
Bond investors pushed Spain's borrowing costs higher, a sign of wilting confidence in the country's ability to support its banks.
The downgrades reflect Moody's view on the ability of the 28 banks to repay their debts. Moody's said the lower ratings stemmed from its having downgraded the Spanish government's credit rating by three notches earlier this month.
Among the lenders suffering rating cuts were Spain's two biggest international banks: Banco Santander and Banco Bilbao Vizcaya Argentaria.
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A downgrade usually means that banks will have to pay more to service their debt. Investors demand higher interest for riskier debt, which is what the downgrades represent.
The Spanish government's financial fate is intertwined with that of the country's banks. Two-thirds of the government bonds are owned by Spanish banks, pension funds and insurance companies.
Moody's said in a statement that the agency is encouraged by measures being taken by Spain to support its banks.
Many analysts believe big banks, including those in the US, would be the first to feel the hit of a freeze-up in Europe's financial system if Spain isn't able to convince bond markets that it can rescue its hobbled banks.
The uncertainty pushed borrowing costs higher for Spain's government on Monday. Its stock market plunged 3.7 per cent.
The other 26 banks downgraded by Moody's are Caja Laboral, Banca March, Caja Rural de Navarra, Caixa Bank, Instituto de Credito Oficial, Bankinter, Banco Cooperativo Espanol, Banco Popular Espanol, Banco Sabadell, Kutxabank, Unicaja Banco, Banco Pastor, Confederacion Espanola de Cajas de Ahorro, Caja Rural de Granada, Bankoa, Liberbank, Ibercaja Banco, Cajamar Caja Rural, Ahorro Corporacion Financiera, Bankia, Banco CEISS, Catalunya Banc, NCG Banco, Banco CAM, Dexia Sabadell and Banco de Valencia.