Moody's cuts debt ratings of 28 Spanish banks

Spain's battered banks have taken another hit, this time in the form of a sweeping downgrade by Moody's.

The rating agency said that it is cutting its views on the debt issued by 28 Spanish banks, including international heavyweights Banco Santander and Banco Bilbao Vizcaya Argentaria.

The Spanish government's fragile finances are making it more difficult for that country to support its lenders, according to Moody's. And it says the banks are vulnerable to further losses from Spain's real-estate bust.

The announcement late Monday from Moody's Investors Service came on the same day that Spain's government formally asked for help from its European neighbors in cleaning up its stricken banking sector. 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 over Spain led to losses Monday in global stock markets. Bond investors, meanwhile, 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 dimming view on the ability of the Spanish 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.

A downgrade usually means that banks will have to pay more to service their debt. Investors demand higher interest for riskier debt implied by lower credit ratings.

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 percent.

The Spanish government's financial fate is intertwined with that of the country's banks. Two-thirds of the government's bonds are owned by Spanish banks, pension funds and insurance companies.

Moody's long-term rating on Banco Santander SA, the eurozone's largest bank by market capitalization, remains in investment grade despite a two-notch downgrade. The rating agency cited Santander's diversified holdings that reduce its exposure to the government's finances. Banco Bilbao Vizcaya Argentaria SA's new long-term rating is one notch below Santander's and just one notch above non-investment, or "junk" status.

The debt of several others, however, is now considered junk. Those include Banco Popular Espanol, Bankinter SA and Bankia.

Moody's did say in a statement that the agency is encouraged by measures being taken by Spain to support its banks.

The rating agency'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.

The downgrades haven't come as a surprise. But they come at a time of great uncertainty in the global economy. Europe's 17-nation currency union is under threat, the U.S. economy is slowing and the economies of India, Brazil and China are cooling.

EU leaders are meeting Thursday and Friday in Brussels for another summit aimed at reining in Europe's debt crisis. Debt-wracked Greece is looking to renegotiate some of the budget-cutting measures it has agreed to in exchange for continued support from international lenders. The summit comes just a week after Greece's new coalition government was formed following months of political turmoil and two inconclusive elections.

Two international audits last week found that Spain could need as much as $77 billion. The government wants the loans to go directly to the banks so that it won't be responsible for repayment in case of a default. That idea has met with resistance.

The size and interest rates of the loans likely will be discussed at the EU summit this week.

Investors are concerned that beyond a rescue for its troubled banking sector, Spain itself may ultimately need a full country bailout like Greece, Ireland and Portugal.

Steep losses stung stock markets on both sides of the Atlantic Monday. The Dow Jones industrial average dropped 138 points to close at 12,502.66, a loss of 1.1 percent. The broader Standard & Poor's 500 index fell even more, 1.6 percent.

In Europe, Britain's FTSE 100 stock index fell 1.1 percent, France's CAC-40 slumped 2.2 percent, while Germany's DAX dropped 2.1 percent. The selling spilled over to Asian on Tuesday, with Nikkei 225 index fell 0.8 percent and South Korea's Kospi was 0.2 percent lower in early trading.

Many analysts believe big banks, including those in the U.S., 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 percent.

The other 23 banks downgraded by Moody's are Caja Laboral, Banca March SA, Caja Rural de Navarra SCC, Caixa Bank, Instituto de Credito Oficial, Banco Cooperativo Espanol SA, Banco Sabadell SA, Kutxabank SA, Unicaja Banco SA, Banco Pastor SA, Confederacion Espanola de Cajas de Ahorro, Caja Rural de Granada SCC, Bankoa SA, Liberbank SA, Ibercaja Banco SA, Cajamar Caja Rural SCC, Ahorro Corporacion Financiera SV SA, Banco CEISS, Catalunya Banc SA, NCG Banco SA , Banco CAM, Dexia Sabadell SA and Banco de Valencia SA.

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AP Business Writer Seth Sutel contributed to this story.

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