Moody's downgrades Spanish banks

The rating agency also downgraded four Spanish regions, two of them to junk.

NEW YORK (CNNMoney) -- Rating agency Moody's downgraded 16 Spanish banks on Thursday, the latest sign of distress in Europe.

Among those downgraded were giants Banco Santander and BBVA, the country's two largest banks. Moody's cited concerns about the banks' exposure to Spain's faltering economy and the "reduced" ability of the Spanish government to support them in a crisis.

"The Spanish economy has fallen back into recession in first-quarter 2012, and Moody's does not expect conditions to improve during 2012," the agency said.

"Moreover, the real-estate crisis that began in 2008 is ongoing, and unemployment has risen to very high levels, with rising risks to white-collar employment (in addition to extremely-high youth unemployment) affecting the outlook for banks' household lending."

The downgrades come amid mounting concern about a potential Greek exit from the euro, and the implications this could have for other fiscally troubled nations like Spain and Italy. Greece, currently operating with a caretaker government, could leave the euro should anti-austerity parties triumph in elections next month.

Earlier Thursday, Moody's downgraded Spanish regional governments in Catalunya, Murcia, Andalucia and Extremadura because they are using massive amounts of debt to fund their operations and are unlikely to meet the financial target set by Spain's central government.

Overall, Spain has pledged to cut its national deficit to 5.3% of GDP, but last week, the European Commission forecasted that the country would fail to meet that goal, instead hitting 6.4% of GDP. Spain announced roughly $35 billion in budget cuts earlier this year.

Credit downgrades are a worrisome sign to investors and can often cause a country's borrowing costs to rise. The yield on Spain's 10-year bond has spiked in the last two weeks, and now sits around 6.3%, its highest level since November.