The percent of bad debt held by Spanish banks increased in March hit an 18-year high of 8.37 percent, or $187.5 billion, the country's central bank announced Friday.

Moody's Investors Service, which this week downgraded the ratings of 16 Spanish banks, said it expects the percentage of bad debt held by the nation's banks to increase.

Banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness, said the ratings agency in a statement.  

The number of nonperforming loans with payments that are 90 days overdue is now about 10 times larger than it was during the peak of the property boom in 1997, according to Dow Jones Newswires. The bust in Spain's real estate bubble is a major and integral part of the euro zone debt crisis.

As the economy keeps getting worse, the banks will keep on having to make provisions to account for the negative impact of the lower activity and the higher unemployment, Steen Jakobsen, chief economist at Saxo Bank A/S, told Bloomberg News. The first step in reaching a solution is recognizing the scale of the problem, and we're not there yet.

Meanwhile, Spain's borrowing costs took a beating Friday after Moody's Investors Services downgraded 16 of the country's lenders, including BBVA SA (NYSE: BBVA) and Banco Santander SA (NYSE: STD), which are considered relatively sound.

Shares of both banks rose in New York trading after Cinco Dias reported that banks are asking the market regulator to reinstate a ban on naked short selling of Spanish financial institutions to prevent further stock erosion.

The yield on the country's 10-year note struck a high of 6.38 percent before settling at 6.21 percent, while the credit default swap on Spanish debt rose five basis points, to settle at 556, after hitting an all-time high of 560.

Deputy Prime Minister Soraya Saenz de Santamaria told a news conference on Friday that the government will reveal the names of two auditors charged with auditing the country's banking sector. Citing unnamed sources, Reuters reported that the two auditors will likely be BlackRock Inc. (NYSE: BLK) and Oliver Wyman Inc., a managing consulting subsidary owned by Marsh & McLennan Cos. Both companies are based in New York; their representatives weren't available for comment.

Spanish media also reported Goldman Sachs Group Inc. (NYSE: GS) will carry out an independent valuation of Bankia SA (Madrid: BKIA). According to Expansion, Bankia needs $10.7 billion to recapitalize on top of the $12.7 billion needed to cover losses in the real estate bust.