Ratings agency Moody's has slashed the ratings of 16 Spanish banks, including Santander, over concerns for the country's banking system.
It cut Santander UK, a subsidiary of Spanish banking giant Banco Santander, one notch to A2 with a negative outlook. Parent company Banco Santander's rating was cut by two notches to A3.
In addition, five Spanish banks' ratings were cut by one notch, three banks suffered two notch downgrades and nine of the country's banks were downgraded by three notches.
Ten of the 17 banks downgraded by Moody's are now on a negative outlook, reflecting an increased chance of the country's banking system going into default.
Spain fell back into recession in the first quarter of 2012, and Moody's does not expect conditions to improve during this year. The ratings agency also cites the ongoing real estate crisis and high unemployment – one in five Spaniards are out of work – as reasons for the widespread downgrades.
Moody's also cites the Spanish government's rising deficit and declining sovereign debt creditworthiness for the bank downgrades. This also prompted the agency to downgrade the government bond rating to A3 with a negative outlook.
Warning for long-term savers
Chris Bowie, head of credit at Ignis, warned earlier this year about holding long-term savings with Santander or its subsidiary Abbey, amid the troubling outlook for the Spanish economy.
"The outlook for Spanish banks is not good. High youth unemployment and the property crisis means Spain could become the next Greece," he says.
Jason Gaywood, director at currency specialist HiFX, says Spain is now a 'huge concern' to the wider eurozone, as it has been reported that there have been widespread withdrawals from Spanish banks over the past few days.
"Spain is a much bigger economy than Greece, Portugal, Ireland or Italy and issues here threaten to spread like wild fire throughout Europe and beyond," he says.
"The situation threatens to descend into an irretrievable spiral resulting in either bank collapse or mass bailouts being required by the European Central Bank and the International Monetary Fund."
Gaywood adds that the situation cannot continue, and sooner or later the money to 'artificially support' these nations will run out. "One gets the feeling that it is now a matter of 'when' rather than 'if' we will witness the break up of the crippled euro."
The downgrades come as ongoing fears over a Greek exit from the euro have plagued the markets. The UK's leading share index, the FTSE 100, dropped to its lowest level in 2012 as it closed at 5338 on Thursday 17 May.
This article was written for our sister website Money Observer