Moody’s has downgraded sixteen of Spain’s banks after a ruin on the country’s deposits shook confidence in the financial system. The downgrade follows the agency’s downgrade of four of the country’s regional authorities yesterday on decreased credit worthiness. The move by the ratings agency adds to downward pressure on the European economy as both political and economic troubles continue to ail the union.

Rumors of a downgrade emerged yesterday as news of the run on the banks became apparent. It had been thought that the ratings agency would downgrade up to 21 of the banks in the country. Banco Santander S.A. (NYSE:STD), one of the 29 international structurally important financial institutions, was downgraded by three notches to A3.

Moody’s highlighted several reasons for the downgrade including the creditworthiness of Spain’s government, the high unemployment rate, a real estate crisis and renewed recession in the Mediterranean nation. The downgrade will cause more trouble for financial institutions in a country dealing with some of the worst effects of the European debt crisis along with several unique problems of its own.

Spain’s unemployment rate has been hitting over 20% for some time now with few signs of improving. The depression in the rest of the Eurozone economies means the country’s youth have few options for emigration. The entire region’s outlook is worse than it has been for some time as Greece looks set for an exit from the Eurozone because of an inability to pay off its debt.

Greece’s exit from the monetary union has been forecast for some time though the country’s inability to form a government may leave the process much messier than is hoped. Fears abound on the consequences the move will have for other countries, most notably Spain and Italy, also struggling under massive debt and malfunctioning institutions.

At the same time the European Fiscal Compact, meant to solve the single currency’s problems and bring a measure of stability to the region, is facing trouble as new French President Francois Hollande has plans to renegotiate the treaty. German and European Union officials are resisting the moves.

The downgrade of Spain’s banks will increase the borrowing costs in the country. The country’s economy will slow down but at this stage it will have little real depressive effect on the economy. The real effect of this move will be to reduce confidence in the country’s financial system and confidence in Europe’s future in general.