Markets fall as Bank of Spain warns on economy
European stock markets have fallen amid concerns about Spain and as trade unions hold a general strike in Greece.
Spain's Ibex index closed down 3.9%, while markets in London, Paris and Frankfurt were down about 2%.
The Bank of Spain said in a report that the Spanish economy had continued to shrink at a "significant rate" in the third quarter of the year.
Spain is currently in a deepening recession, with the unemployment rate at its highest level since the 1970s.
Banking stocks across Europe were sharply lower, with France's Credit Agricole down 7.5%, Germany's Deutsche Bank dropping 6.5% and RBS in the UK down 5.5%.
Worries about Spain also caused the country's borrowing costs to rise, with the yield on 10-year Spanish bonds traded on international markets rising to 6.02% from 5.67%.
And the euro fell to a two-week low against the dollar, down 0.35% at $1.2858, having earlier hit $1.2848.
Spain's Economy Minister Luis de Guindos said on Saturday that he expected the economy to contract by about 0.4% in the July-to-September quarter.
And in its latest monthly report, the Bank of Spain said: "Available data for the third quarter of the year suggests that GDP kept falling at a significant rate, in a context of high financial tensions."
The problems in the eurozone are now back in focus after the summer break.
In other developments:
- Police have fired tear gas at demonstrators in Athens as protesters stage a day-long general strike against new austerity measures, which are a pre-condition to Greece receiving its next tranche of bailout funds
- On Tuesday, an anti-austerity rally outside the parliament in Madrid turned violent, with police firing rubber bullets and baton-charging protesters; 38 people were arrested and 64 injured
- The regional government in Catalonia has called snap elections for 25 November, which will be seen effectively as a referendum on Catalan independence and could also jeopardise plans for national economic reforms.
- Portugal is holding an extraordinary cabinet meeting after big protests forced the government to withdraw a plan to increase employees' tax rates
- On Friday, an independent audit of Spain's banks will reveal how much they will need of the 100bn euro aid package that Europe has already approved; previous independent audits have said that they will need up to 62bn euros
- Also on Friday, credit rating agency Moody's will publish its latest review of Spain, and may downgrade the country's debt to "junk" status
The Spanish government has introduced highly unpopular spending cuts and tax rises as it attempts to reduce the country's deficit.
It will present details of an emergency budget on Thursday.
But with a shrinking economy and unrest in the country, reducing the deficit with further austerity measures may prove a difficult task for the government.
"The protesters definitely don't want any more austerity, Spain's economy is already mired in recession and the unemployment rate is nearly a quarter of the workforce," said Kathleen Brooks from Forex.com.
"However, there is also a deeper concern: that the budget won't be warmly accepted by the markets, which could then force Madrid to request financial aid complete with more austerity conditions in the coming weeks."
There is real concern in Europe that Spain may need an international bailout going beyond the 100bn euros (£80bn; $125bn) pledged by eurozone finance ministers in June to rescue its banks, but Prime Minister Mariano Rajoy has so far avoided requesting one.
"The markets have been getting very, very worried about this delay," Philip Tyson from ICAP told the BBC.
"To activate a bond-buying programme by the ECB [Mr Rajoy] needs to apply for a bailout and he seems to be resisting."
But in an interview with the Wall Street Journal, Mr Rajoy suggested that he would seek a rescue package if debt financing costs remained too high for too long.
"I can assure you 100% that I would ask for this bailout," he said.
Responsibility for banks?
Meanwhile, there is uncertainty about the extent to which the Spanish government will be able to avoid bearing the costs if a European bailout of the country's banks does not work.
On Tuesday, Germany, the Netherlands and Finland issued a joint statement setting out the terms under which they would be willing to let the European Stability Mechanism (ESM), the eurozone's permanent bailout fund, recapitalise banks that find themselves in trouble.
The statement appeared to go against what was agreed by EU leaders in June that paved the way for the direct recapitalisation of problem banks.
The three countries distinguished between future banking problems and "legacy" difficulties, implying that highly indebted banks would remain the responsibility of their countries' governments.
Spain and Ireland had both seen the June summit as implying that a way would be found to break the link between their indebted banks and the debts of the government.