Moody's Investors Service downgraded the debt ratings of 26 Italian banks Monday as they struggled with the effect of the weak economy and government austerity measures.
The move means Moody's now ranks Italy's banks lower than most of their Western European peers.
The ratings agency said the banks are suffering because Italy is back in recession and government measures are cutting demand for loans. Banks are facing more loan losses, limited access to funding and weaker profits.
Moody's noted, however, that support from the European Central Bank lowered the default risk of many of the banks.
The firm lowered its long-term debt and deposit ratings by one notch each for 10 banks, by two notches for eight banks, by three notches for six banks and by four notches for two banks. It also downgraded the short-term rating on 21 banks by one or two notches, which triggered long-term rating downgrades.
The firm's outlook for all 26 banks is negative.
Moody's said Italy relapsed into recession in early 2012 and there are no clear signs of recovery.
The government's austerity measures and other reforms are weighing on the country's economy, and that could cause further loan delinquencies, particularly among corporate and small-business borrowers.
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