Moody's downgraded the debt of 30 Spanish banks Thursday but left untouched the ratings of the country's three largest banks, highlighting the weaknesses in Spain's financial system a day after the government in neighboring Portugal fell.
The ratings agency acted two weeks after downgrading Spanish government debt one notch to Aa2. Then, it cited worries over the cost of the banking sector's restructuring, the government's ability to reach its borrowing reduction targets and the country's grim economic growth prospects.
Moody's said its reasons for downgrading banks' senior debt Thursday included higher pressure on Spanish sovereign debt and many weak banks, a declining role within the banking system for smaller and regional banks as the sector consolidates, and what it called a weakening future support environment for banks across Europe.
The fall of Portugal's government on Wednesday pushed that debt-laden country closer to needing a bailout like Greece and Ireland got last year, and almost inevitably shined a spotlight on the much bigger Spain, a bailout of which would be devastating for the 17-nation eurozone.
Moody's Investors Service confirmed the ratings of big banks Santander and BBVA and savings bank La Caixa, although with a negative outlook.
But it downgraded the deposit and/or senior debt ratings of 30 Spanish banks by one or more notches. It said this includes downgrades of 15 banks by two notches and five banks by three or four notches.
Spanish stocks opened about 1 percent lower Thursday after the collapse of the government in neighboring Portugal but closed 1.1 percent up compared to Wednesday's closing position.
The yield on Spanish 10-year government bonds was also virtually unchanged early Thursday at 5.18 percent.
Spanish Finance Minister Elena Salgado, asked about how the events in Portugal would affect her country, said: "We have to keep doing what we have been doing so far _ continue to enact reforms, live up to our commitments, strengthen our economy."
She was referring to austerity measures that Spain has taken to chip away at its bloated deficit and other measures designed to stimulate an economy that is struggling to overcome nearly two years of recession triggered by the collapse of a real estate bubble.
Salgado declined to comment on Thursday's bank rating downgrade by Moody's.
Alejandro Varela of Madrid brokerage Renta 4 said a bailout of Portugal will actually help Spain and the sooner it happens the better, because Spain's troubled banking sector holds a lot of Portuguese debt.
He said Spain right now is not in danger of needing a bailout, citing a total debt-to-GDP ratio that is much smaller than Portugal's or Greece's and healthy investor appetite of late for Spanish debt being auctioned off. The yield on Spanish 10-year bonds is just over 5 percent, compared with nearly 8 percent for Portugal.
But much will depend on how Spain's bank restructuring drive goes, particularly that of savings banks known as cajas, which are heavily exposed to Spain's burst real estate bubble. They now face stricter core capital ratio requirements and are racing to raise new capital or face the prospect of partial privatization late this year.
"Over the short term _ and I stress, the short term _ we should not have any problems," Varela said. But if Spanish bond yields shoot up to Portuguese levels, Spain is in trouble, he added.
Spanish banks hold euro70 billion in private debt in Portugal such as home mortgages, and nearly euro9 billion in government debt, according to the Spanish Treasury.