Among the worst hit by the S&P downgrade was Santander and its core subsidiary Banco Espanol de Credito S.A, which were downgraded from A- to A-2, and A+ to A-1 respectively. Meanwhile, the ratings agency cut its rating on Santander’s senior debt to A- from A+.

S&P also lowered its rating on the bank’s non-deferrable subordinated and Tier 1 hybrid notes one notch and placed them on a negative outlook.

The ratings agency lowered its credit rating on BancoBilbao Vizcaya Argentaria(BBVA) to BBB+/A-2 from A/A-1 with a long term negative outlook. It also lowered its rating on BBVA's senior debt to BBB+ from A. S&P cut its rating on BBVA’s non-deferrable subordinated debt and Tier 1 hybrid notes by one notch and placed them on a negative outlook.

S&P said the negative outlooks on Santander and BBVA mirrored that on the long-term rating of Spain’s sovereign debt, which the ratings agency downgraded last week.

Official figures released on Monday showed the Spanish economy contracted by 0.3 percent in the first three months of the year, taking the country back into recession. The figure beat economists’ expectations which had forecast a contraction of 0.4 percent. The fall in output matched that of the final quarter of 2011.

The downgrades follow a report in the Financial Times on Sundaythat Spain’s government and its banks are discussing a new scheme to segregate problematic property loans into one or more asset management companies to relieve the burden on struggling lenders, according to officials and bankers.

The “bad bank” scheme is the latest attempt by the center-right government of Mariano Rajoy, prime minister, to avoid an international rescue program of the sort required by Greece, Ireland and Portugal.

S&P said that last week’s sovereign downgrade had direct negative rating implications for the banks it rated at or above the sovereign rating on Spain, and on most banks hose ratings incorporated uplift over their "stand-alone credit profiles" to reflect Spanish government support.

The downgrade of the country’s 16 biggest banks was therefore a direct result of the downgrade of Spain’s sovereign debt. Santander and a number of its subsidiaries was rated one notch above the sovereign while BBVA and BBSA were rated at the same level as Spain’s sovereign debt.

Perhaps reflecting its view of the “bad bank” scheme, S&P added that its rating action on the banks only factored an uplift into its ratings to reflect Spanish government support on four banks. Those banks were Bankia, and indirectly its parent company BFA, Banco Popular, and Banco Sabadell; and CaixaBank, and its parent company, la Caixa, which the ratings agency said were the only banks it anticipated would likely benefit from one notch of government support.

Among the other banks to suffer the downgrade were:

Banco de Sabadell, which saw its long- and short-term counterparty credit ratings lowered to BB+/B from BBB-/A-3 respectively. S&P said the long-term rating on Banco de Sabadell remained negative.

S&P lowered its long and short-term counterparty credit ratings on Ibercaja Banco to BBB-/A-3 from BBB/A-2. Both the long and short-term ratings outlook for the bank remained negative.

The long and short-term counterparty credit ratings on Kutxabank fell to BBB-/A-3 from BBB/A-2 with S&P placing the ratings on a negative outlook.

Banca Civica saw its credit ratings cut to BB+/B from BBB-/A-3 with a negative outlook.

Bankinter saw its long and short term credit ratings cut to BBB-/A-3 from BBB/A-2 with a negative outlook.

Confederacion Espanola de Cajas de Ahorros ratings were cut to BBB-/A-3 from BBB/A-2 with a negative outlook.

Barclays Bank S.A. (BBSA) saw its ratings cut to BBB+/A-2 from A/A-1 and a negative outlook.

CaixaBank S.A was cut to BBB+/A-2 with a negative outlook, and its parent Caja de Ahorros y Pensiones de Barcelona (la Caixa) saw its credit rating cut to BBB-/A-3 all debt ratings were placed on credit watch with a negative outlook.

Bankia S.A. had its credit ratings cut to BBB-/A-3 with a negative outlook, while its parent company Banco Financiero y de Ahorros S.A was cut to BB- . S&P affirmed its B short-term rating on BFA.

Banco Popular Espanol S.A saw its long and short term counterparty credit ratings held at BBB-/A-3 but the outlook for the bank remained negative.

S&P said it expected to conclude its review on the wider implications of the sovereign downgrade on the economic and industry risks for the Spanish banking sector and the Spanish banks by the end of May. It added that it was currently of the view that any potential negative rating actions would likely be limited to one or two notches.