Moody’s downgrades the entire Spanish banking sector

Agency “views positively” government’s measures to shore up system Santander one notch higher than Spain’s sovereign debt

Madrid -

Moody’s late Monday downgraded the ratings of 28 Spanish banks adding to the growing fears that the country’s financial institutions may need a higher amount of European Union money than forecast to clean up their balance sheets.

The downgrade came just hours after Economy Minister Luis de Guindos formally asked the Eurogroup to launch the bailout mechanism for Spanish banks which, according to two audits, could need at least 62 billion euros to cover their holes. The Eurogroup’s EU finance ministers have offered up to 100 billion euros.

In a statement, the ratings agency said that despite the bank downgrades, Moody’s “views positively” the broader measures being taken by the Spanish government to shore up the banking system.

“Moody's will assess the impact of the upcoming recapitalization on banks' creditworthiness and bondholders once the final amount, timing and form of funds flowing to each individual bank are known,” the company said.

On June 13, Moody’s downgraded Spanish bonds from A3 to Baa3, just one notch above junk status.

Of the 28 banks downgraded, only Banco Santander and its consumer finance division retained their credit rating of Baa2 – higher than the Spanish government’s own debt. BBVA, Banesto, Caixabank, Caja Laboral, Banca March and Caja Rural de Navarra all were given Baa3.

Other banks with significant downgrades include Banco Popular, which had the biggest drop from A3 to Ba1; Bankinter, two notches down from Baa2 to Ba1; and Sabadell from Baa1 to Ba1.

Financial analysts have told Reuters the European bailout will push many banks to sell off their stakes in the nation’s top companies, such as Telefónica and Repsol. The move would mean an end to the traditional cozy relationship between corporations and financial institutions, and could prompt a shake-up in the ownerships of some of the country’s biggest firms. For example, UBS says that as much as 22 billion euros of stock in Spanish companies may be up for grabs.

Meanwhile, the financial chiefs of Spain, Germany, Italy and France will hold talks today to discuss trying to come up with a common policy for long term fiscal and banking integration ahead of a meeting to be held by the leaders of four countries on Wednesday.

A two-day full European Summit will begin on Thursday.

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