Rating agency Moody's cut on Wednesday Spain's government bond rating to Baa3 from A3 and placed it on review for possible further downgrade.

According to the statement issued by Moody's, the downgrade decision reflects some key factors.

Moody's believed that the Spanish government intends to borrow up to 100 billion euros from the European Financial Stability Facility (EFSF) or from its successor, the European Stability Mechanism (ESM), to recapitalize its banking system. This will further increase Spain's debt burden, which has risen dramatically since the onset of the financial crisis.

Investors were concerned about Spain's financial situations even though the 100-billion-euro package was approved only days ago. Some investors believed that such bailout package which focused only on individual European companies is a fool's errand because those companies will soon or later be in trouble again and moreover, Spain will be short of money in the near future.

Moody's seemed to agree with such concerns. The rating agency stated that the Spanish government has very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalization funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, and the banks in turn obtain funding from the ECB.

The rating agency also said the Spanish economy was too weak.

As for the review for possible further downgrade, Moody's said it expects to conclude the review within a maximum time frame of three months.

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International rating agency Moody's downgraded on Wednesday the Spanish sovereign debt from A3 to Baa3 with a negative outlook.

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Fitch cuts ratings for 18 Spanish banks

The decision came after the ratings agency slashed Spain's sovereign debt rating by three notches last week to BBB and downgraded the country's two biggest banks Santander and BBVA on Monday. 

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