Ratings agency Moody's Investors Services sent yet another shockwave down the spine of the European financial industry on Thursday afternoon, downgrading 16 Spanish banks after equity markets had closed in New York.

The downgrades included flagging smaller institutions as well as giants Banco Santander and BBVA, the country's two largest banks and two of the most important players in European finance. The main reason for the downgrade, according to Moody's, is the banks' exposure to the weakening Spanish economy, which affects their balance sheets and bottom lines, and also gives the government reduced ability to support the banks 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 in the same week investors are fearing an exit by Greece from the common currency union.

BBVA and Santander, which are traded as American depositary shares in the New York Stock Exchange, got clobbered after the Moody's release. New York-traded shares of Banco Bilbao Vizcaya Argentaria SA (NYSE: BBVA) lost 4.52 percent in after-hours trading -- after having lost 2.93 percent during the regular session -- and recently quoted at $5.70. Shares of Banco Santander, S.A.(NYSE: STD) fared slightly better, losing 0.36 percent in after-hours after having dropped 1.94 percent earlier in the day, and recently quoted at $5.54