Spain back into the eye of the Euro storm

Euro crisis ensnares Spain

Spain moved back into the eye of the eurozone storm on Thursday, as the country’s borrowing costs rocketed to unsustainable levels and the country's banking sector was hit by mass downgrades

the Telegraph,

17 May, 2012

Moody's slashed the ratings of 16 Spanish banks on Thursday evening, citing the reduced ability of the Spanish government to provide support to the sector, as well as the "adverse operating conditions" characterised by a renewed recession.

The rating agency also downgraded Santander UK, although, at "A2," it is still rated one notch above its parent bank Banco Santander. Moody's highlighted that Santander UK has "no direct exposure to the Spanish government (or regional governments)".

Earlier in the day, shares in Bankia, the country’s fourth biggest bank, plunged by as much as 29pc amid reports that depositors had pulled out €1bn in the past week.

Madrid was then forced to pay 50pc more than in March to drum up interest in a €2.5bn (£2bn) bond. By then end of the day, borrowing costs for benchmark 10-year sovereign debt in Spain rose 2 basis points to 6.21pc, while gilts and German bunds dropped to fresh lows of 1.834pc and 1.41pc respectively. Britain’s debt management office was swamped with record demand for a 'safe haven’ £1.5bn gilt auction.

As pandemonium struck Spain, Fitch slashed Greece’s credit rating deeper into junk, from B- to CCC, to “reflect the heightened risk that [it] may not be able to sustain membership of the monetary union” and warned that all eurozone members would be at risk of a downgrade if Greece exited.

Markets across the world slumped as fears gathered that a new and incalculable crisis was approaching. In London, the FTSE 100 fell to a six month low, dropping 1.2pc to 5,338 points, while France’s CAC and Germay’s DAX also dived 1.2pc, and Wall Street dropped almost 1pc in early trading

In Spain, Nicholas Spiro, managing director at Spiro Strategy, said the high cost of the Madrid bond auction was evidence that “'break-up contagion’ is seeping into Spanish yields”. “Make no mistake about it, these are painful auctions for the Treasury,” he added.

In a desperate plea to Brussels, Spain’s economy secretary Fernando Jimenez Latorre said: “Spain is making every necessary adjustment to fiscal police, structural reforms and there should be some kind of reaction from the European Central Bank to support us.”

Mr Latorre was bounced into denying claims that there was a run on savings at Bankia or that the banks’s shares were being suspended. “It’s not true that there is an exit of deposits at this moment from Bankia,” he claimed.

Bankia’s chairman, Jose Ignacio Goirigolzarri, said depositors could remain “absolutely calm”. Following the intervention, the shares recovered a little to close 14pc lower. The day had already begun badly with confirmation that Spain was back in recession, shrinking 0.3pc in the first three months of the year.

As the crisis in the euro periphery spiralled out of control, divisions at its core deepened further. Pierre Moscovici, France’s newly-appointed finance minister, reiterated that the fiscal pact “will not be ratified as it stands” in the face of German Finance Minister Wolfgang Schaeuble’s call “to create a political union now”.

David Cameron also demanded urgent action by Europe’s leaders for closer integration to spare the world economy from disaster ahead of crunch talks at the G8 meeting today in Camp David.

With the odds on Greece leaving the euro shortening, economists warned a messy exit could cost the eurozone up to $1trillion (£630bn). Even the International Monetary Fund could be at risk of losing its bail-out contributions.

Fabrice Montagne at Barclays Capital said: “Even though the IMF prides itself on never having made any losses on a programme, a Greek exit would certainly challenge this record.”