Spanish short-term borrowing costs have risen substantially in its latest debt auction, reflecting the country's struggle to service its debts at a sustainable level.
Moody's Investors Service has downgraded the credit rating on 28 Spanish banks, including Banco Santander, less than a month after cutting the nation's sovereign rating.
Henderson Global Investors' bond fund manager John Pattullo said the current crisis in Spain will result in Spanish bank bondholders taking severe haircuts, after a similar scenario in Ireland last year.
Banking stocks across Europe were falling this afternoon, with investors fretting over Spain's ability to fund itself after yields spiked above 7% once again.
Niall Gallagher, European equities manager at GAM, has found value in unloved peripheral European equities overlooked by risk-averse investors.
Spanish government bond yields have shot through the danger level of 7% as fears grow its debt could soon be rated as junk.
Moody's has downgraded Spain's credit rating by three notches to Baa3 from A3, just above junk status, and placed it on review for further possible downgrades.