Spanish banking system teetering

A big credit downgrade for 5 of Spain's largest banks as well as the largest government bail out of a bank in Spain's history has shaken the entire banking system and threatens the Spanish economy.

LA Times:

It's not looking good for the Spanish banking system. Standard & Poor's just slashed the credit ratings of five banks and said the country is headed into a double-dip recession. One of them, Bankia, just asked the government for 19 billion euros in aid - a roughly $23.8 billion boost.

That makes it the largest bank bailout in Spain's history. Combined with escalating concerns that Greece is about to execute its so-called Grexit from the euro currency, the news is doing nothing to alleviate the heightened anxiety in the euro zone.

Standard & Poor's, which caused market shockwaves last summer when it downgraded U.S. debt, said the Spanish banking sector was vulnerable to turbulence in capital markets because it relies heavily on foreign funding.

The ratings agency dropped Bankia, Bankinter and Banco Popular Espanol into junk status, all with a BB+ score. Banca Civica and Bankia's parent company, Baco Financiero y de Ahorros, also were lowered.

S&P downgraded ratings on 11 Spanish banks in late April, not long before Moody's did the same to 16 banks in the embattled country.

The mass slashing is based on S&P's concerns "that the correction of the economic imbalances accumulated during the boom is still underway and will have a very high impact on the financial system."

A run on Spanish banks would drastically affect Italy and France's banking systems as well and would probably finish off Greece. With some analysts giving a "100% chance" of a worldwide recession this year, and an economic slowdown already underway in China, it's hard to see how the euro zone will escape disaster and the world avoid a serious downturn.