Moody's Investor Service is cutting its credit ratings on 28 Spanish banks, saying the weakening financial condition of Spain's government is making it more difficult for that country to support its lenders.
Moody's also said the banks are vulnerable to losses from Spain's busted real estate bubble.
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 of a 125 billion US dollar (£80 billion) loan package Spain would ask for.
That uncertainty led to losses Monday in stock markets in the Europe and the US Bond investors pushed Spain's borrowing costs higher, a signs of lagging confidence in the country's ability to support its banks.
The downgrades are a measure of Moody's view on the ability of the 28 banks to repay their debts. Moody's said the downgrades stemmed from its lowering of Spain's credit rating by three notches earlier this month.
A downgrade usually means that banks will have to pay more for their debt. Investors demand higher interest for riskier debt, which is what the downgrades represent. However, with interest rates already at rock-bottom levels, the lower ratings may not significantly affect the cost of funding for the banks.
Spain formally asked the European Union on Monday for rescue loans to help clean up its troubled banking industry. The Spanish economy, the fourth-largest of the 17 countries that use the euro currency, is suffering from the aftershocks of a real estate bust that has devastated families as well as banks. Unemployment is nearly 25%.
The financial strength of Spain's government hinges on that of the country's banks, as both government and banks struggle for survival. Two-thirds of Spain's government bonds are owned by Spanish banks, pension funds and insurance companies.
Moody's said in a statement that the agency was encouraged by the broad measures being introduced by Spain to support its banks.
Moody's move came four days after the rating agency downgraded some of the world's biggest banks, including Bank of America, JPMorgan Chase and Goldman Sachs, reflecting concern over their exposure to the violent swings in global financial markets. Moody's also cut the ratings on seven German and three Austrian banks this month.