Market jitters over troubles for Greece and Spain

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European markets suffered a jittery session on Friday as concern continued over Greece and Spain.

Spain's main Ibex index recovered after losing more than 2% early on, ending the day slightly higher.

Investors moved money into German bonds, which are seen as low-risk, while the oil price fell, reflecting global economic concerns.

After European markets closed, ratings agency Fitch revealed it had downgraded five Greek banks.

Fitch cut the ratings of National Bank of Greece, Efg Eurobank Ergasias, Alpha Bank, Piraeus Bank and Agricultural Bank of Greece from B-minus to CCC.

The move came a day after the agency cut Greece's sovereign rating.

On Thursday, fellow agency Moody's downgraded 16 Spanish banks and cut the debt rating on Santander UK, a subsidiary of the Spanish banking giant.

European banks, which had fallen on Thursday, recovered on Friday. Santander reversed early losses to trade 2.8% higher at the close, and Bankia shares jumped 23% following Thursday's 14% slump.

Olli Rehn: "We are taking all neccessary action to overcome this crisis"

Moody's said there were several reasons behind the downgrade, including Spain's slide back into recession, the financial challenges facing the Spanish government and bad loans in the property industry.

But Moody's also recognised that banks had made progress in improving their financial situation, and noted the European Central Bank was providing support.

The proportion of loans that have gone bad at Spanish banks hit a record 8.37% in March, the worst level for 18 years, according to figures from the Bank of Spain.

Perfect storm

On Monday, Spain will announce the names of two firms who will audit the nation's banking industry, Spain's Deputy Prime Minister, Soraya Saenz de Santamaria, has announced.

Why Moody's downgraded Spanish banks

  • Spain's recession and high unemployment
  • Weak government finances, affecting its ability to bailout banks
  • Bad loans in the property sector
  • Lack of access to funding

She said the analysis will start with a stress test followed by a closer look at the assets held by the industry.

The Spanish government hopes the audit will reassure investors who fear that Spanish banks are not revealing the full extent of bad loans.

Despite rising bad debts and downgrades, and reports of large withdrawals by worried savers from troubled banking group Bankia, the Spanish government does not expect a run on the country's banks.

Spanish Treasury Minister, Inigo Fernandez de Mesa, told the BBC: "This is a scenario I do not contemplate. The Spanish banks have plenty of liquidity. They have been funded through the central government for the next two years, so there is no problem of liquidity at all in Spain."

Philippe Bodereau, lead analyst on European banks at Pimco, the world's biggest manager of bond investment funds, said: "You do have a perfect storm for Spanish banks in the form of contagion sequence coming from Greece, hitting Spanish government bonds, hitting the Spanish banks as well.

IBEX 35 Index

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"The Spanish banking system has been under stress for quite some time, at least portions of the Spanish banking system... we're talking primarily about the small savings banks as well as a one large one called Bankia," he said.

Confidence has also been knocked by the political crisis in Greece, where politicians are preparing for the second election in six weeks.

It is possible that the election on 17 June will result in a government that would refuse to implement the austerity measures that Greece's last remaining international creditors are insisting on.

Speculation is increasing that Greece may have to leave the eurozone.

The challenges facing Greece and Spain will be under discussion this weekend at the Group of Eight (G8) summit at the US Presidential retreat Camp David in Maryland.

President Barack Obama will host leaders from the UK, France, Germany, Italy, Russia, Japan, Canada, and the European Union.

"The G8 meeting in Camp David today and tomorrow will be used to pressure eurozone politicians to take immediate and decisive action to stop contagion ripping the region apart," said the Dutch bank Rabobank in a research note on Friday.

"Whether the meeting will bring any signs that eurozone politicians may be willing to allow Greece to exit the system remains to be seen, but this type of rhetoric would likely have to be pre-empted by policies designed to limit contagion tightening its grip on Spain," the note said.

Asian losses

On the oil markets, the price of Brent crude fell to its lowest level for the year, at $106.40 a barrel, before recovering.

Meanwhile the yield on 10-year German bonds, that is, the return it has to pay to attract investors, fell to a record low.

Earlier in Asia, stock markets registered heavy losses. Tokyo's Nikkei average fell 3%, the biggest one day fall since last August.

Banking shares were hurt after the chief executive of ANZ said volatile market conditions meant that Australian banks were not lending to each other.

The wholesale lending markets are an important source of funds for banks.

"Right now, markets are closed again, and this is what happens in this sort of situation," said ANZ chief executive Mike Smith.

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