Moody’s Downgrades 21 Spanish Banks

May 17, 2012 Updated: May 24, 2012

Following the downgrade of 26 Italian banks earlier this week, credit ratings firm Moody’s Investors Service downgraded a slew of Spanish banks on Thursday. Sources said that in total, 21 banks were affected.

“Sources in the Spanish financial sector are convinced that the agency will lower in a significant manner the ratings of numerous institutions,” said the Spanish economic daily Expansion newspaper.

Moody’s analysts published a report earlier this week stating that Spanish banks “are vulnerable to the recession and the continuing housing crisis. The problem loans and losses will continue to grow, including categories such as residential mortgage loans, loans SMEs, and consumer finance segments not covered by the recent royal decree. The vulnerability of banks to these adverse conditions is a factor in revising the rating of many Spanish banks. “

Last month, Spanish banks borrowed a record high 263.5 billion euros ($334 billion) from the European Central Bank (ECB), partly due to fear of downgrade and therefore, an increase of borrowing costs.

Fearing the collapse of Spain’s economy, many Spanish residents have lost trust in the country’s banking system. During last week, Spanish residents have withdrawn a record high 1 billion euros from Bankia Bank, the bank which became state-owned this month and holds approximately 10 percent of Spain’s total funds. This is similar to the phenomenon in Greece where many Greeks have withdrawn their money from the country’s banks and invested them outside in countries like Germany and Switzerland.

The unstable banking sector is one of the main reasons why Spanish economy fell into recession in the first quarter of 2012 as it sunk 0.3 percent compared to the last quarter of 2011.

“The recession is proceeding at a gradual pace but taking in to account the latest business survey it seems that the contraction in economic activity is going to stretch well in the coming quarters,” said economist at Unicredit Tullia Bucco.

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