Embattled Spain tries to calm fears of run on deposits at bank
Moody's downgrades four regions as reports say €1bn taken from bailed-out Bankia
THE flames of the eurozone crisis leapt higher yesterday, as fears spread about the state of the Continent's most vulnerable banks.
Shares in the Spanish lender, Bankia, plummeted 30pc at one stage in trading, following a report that customers had withdrawn €1bn in deposits since the Madrid government was forced to part-nationalise the bank last week.
Bankia released a statement in the afternoon saying that the deposit fall was simply a seasonal effect rather than a bank run. This served to stabilise the share price, but the lender still ended up losing 14pc of its value.
There were also rumours last night that the credit rating agency Moody's was preparing to downgrade a host of Spanish banks, a move that could push up their costs of funding. Earlier, the rating agency did down grade four regions.
Yesterday's Spanish panic followed a warning earlier in the week from the Greek President, Karolos Papoulias, that savers had withdrawn €700m from Greek banks since the country's inconclusive election result on 6 May.
Markets have also been spooked by revelations that Greek banks are now unable to access certain forms of liquidity support from the European Central Bank and a further downgrade by Ftich rating agency.
The fragile European financial system has moved to the centre of the sovereign debt crisis.
The dominant fear is that a Greek exit from the eurozone will prompt a series of runs on weaker banks across the Continent, stretching the resources of governments beyond breaking point and forcing nations such as Spain and Italy to seek official assistance from the eurozone and the International Monetary Fund (IMF).
The Spanish banking sector is a particular source of alarm. Analysts estimate the nation's lenders could be sitting on unrecognised bad property loans of up to €100bn.
The Spanish government last week unveiled a plan to require its banks to put aside an extra €30bn against future possible losses and announced an independent audit of its lenders' balance sheets.
But that was seen as inadequate to restore confidence. Madrid has been encouraged to seek support now for its banking sector from the European bailout fund, the European Financial Stability Facility.
In Athens yesterday, a caretaker government was sworn in after the largest political parties failed to form a coalition. New elections will be held on June 17.
Senior European politicians have warned that, unless the next Greek government signs up to further austerity and economic reforms, Athens's bailout funds will be cut off. This would prompt a default by Greece on its debt and an exit from the single currency.
The uncertainty over the future of the single currency hit the value of the euro. It fell to a four-month low against the dollar at €1.27.
The euro also slipped to its lowest level against the Japanese Yen since February. The single currency is at its weakest level against sterling in three-and-a-half years.