Moody’s downgraded the debt of five Spanish regions, including the economic powerhouse of Catalonia, on Tuesday warning that some of the country’s largest autonomous regions were suffering from “very limited cash reserves” and deteriorating liquidity.

Aside from Catalonia, which accounts for 20 per cent per cent of Spain’s economic output but is heavily in debt, the rating agency also downgraded the bonds of Andalucia, Extremadura, Castilla-La Mancha and Murcia. The credit rating for other Spanish regions was left unchanged. Moody’s reiterated its negative outlook both for the debt issued by all Spanish regional debt as well as for bonds issued by the central government, however.

The yield on Spanish 10-year bonds moved higher in response to the downgrade, rising 4 basis points to 5.54 per cent. Analysts suggested the latest fall in Spanish bond prices could also reflect uncertainty among investors over Madrid’s readiness to apply to the EU rescue fund for a sovereign bailout – a request that many believe would go a long way towards easing market concern over the sustainability of Spain’s financial position.

Both Moody’s and Standard & Poor’s last week opted to keep Spanish sovereign debt above junk status, offering a political and economic reprieve to Madrid and sparking a rally in Spanish bonds . With the exception of Extremadura, all the regions affected by Tuesday’s downgrade have already applied to the Spain’s own regional rescue fund for a bailout. In a statement, Moody’s acknowledged that the availability of central government financing for the cash-stricken regions “greatly reduces the risk of a region’s liquidity driven default in the near term”.

But the agency warned that even a bailout would do nothing to tackle the region’s “fundamental economic and financial weaknesses”. It pointed in particular to the “significant uncertainty regarding viable long-term funding alternatives” and the regions’ “significant difficulties in controlling their deficit and debt trajectories”.

Spain’s regional bailout fund, the FLA, has so far received requests from five regional governments for aid in excess of €15bn – equivalent to 85 per cent of the total funds at the FLA’s disposal.

“Despite the magnitude of the funding requests, we currently believe that the central government will provide financing to the regions very sparingly, ensuring that debt repayments are met but avoiding large funds transfers in order to maintain its grip on regions rebalancing plans and financial trend,” Moody’s said in a separate report on the FLA, issued on Monday.