Spain banking sector shaken by report of bank run

Associated Press Modified: May 17, 2012 at 5:00 pm •  Published: May 17, 2012

The government, meanwhile, risks requiring a bailout itself if it needs to rescue the banks. It is already struggling to meet deficit-reduction targets during a painful recession, with unemployment of nearly 25 percent and austerity measures draining money from the economy.

Concerns over banks' exposure to the eurozone's debt crisis once again slammed Europe's financial sector over the past week. The political vacuum in Greece following the inconclusive election result nearly two weeks ago has led to an increase in funds being drawn from the country's banks.

Greek president Karolos Papoulias warned party leaders during unsuccessful coalition talks that about €700 million ($898 million) in deposits have flown out of Greek banks since the May 6 elections, according to a report from Greece's central bank governor, George Provopoulos

"The situation in the banks is very difficult," Papoulias said according to a transcript of the meeting's minutes released by his office. "Mr. Provopoulos told me that of course there is no panic, but there is great fear which could turn into panic."

Fitch ratings agency on Thursday downgraded Greece by a notch to the lowest grade for a country that is not in default, citing the risk that the country may leave the eurozone if the next elections do not produce a government that supports the bailout.

Earlier this week, rival agency Moody's downgraded the debt ratings of 26 Italian lenders as they struggled with the effect of the country's weak economy and government austerity measures. The move means Moody's now ranks Italy's banks lower than most of their Western European peers.

Meanwhile Spain's Treasury on Thursday managed to sell three kinds of bonds, two maturing in 2015 and one in 2016, for a total of €2.5 billion ($3.18 billion). For the three-year note, the only one which was comparable to previous sales, Spain's borrowing rate — or yield — rose to 4.87 percent, from 4.04 percent in a similar auction on May 3.

On the secondary market, where issued bonds are traded freely, the interest rate on Spanish 10-year bonds stood at a worryingly high 6.29 percent. It has risen sharply from below 5 percent in March and is edging toward the 7 percent mark that is considered unsustainable in the longer term. Greece, Ireland and Portugal sought bailouts when their 10-year bond yields remained stuck above that level.

Prime Minister Mariano Rajoy warned this week that the country risked being frozen out of capital markets because of the sky-high interest rates, or yields, it would have to pay to maintain its debt.

After Spanish markets closed Thursday, Moody's announced that it had downgraded the credit ratings of four of Spain's 17 semiautonomous regions that function much like U.S. states. Overspending and debt accumulated by these regional governments has added to the country's economic problems.

Spain's government on Thursday approved new budget-cutting plans for 16 of the regions, and the country's National Statistics Institute confirmed that Spain went into recession again for the second time in three years. Gross domestic product declined 0.3 percent in the first quarter that ended in March.


AP Business Writer Alan Clendenning contributed from Madrid.

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