8 Jun 2012

Downgraded Spain set to request funds for banks

8:52 pm on 8 June 2012

Spain is expected to make a request on Saturday for a financial package to prop up its troubled banks, according to two senior EU officials and a German source.

On Friday, Spain's credit rating was slashed by three notches by credit rating agency Fitch, which signalled it could make further cuts as the cost of restructuring the country's troubled banking system spiralled and Greece's crisis deepened, Reuters reports.

The new rating of BBB leaves Spain just two short of junk status, which would force many institutional investors to automatically dump Spanish assets.

Fitch said the rating downgrade reflected higher than expected recapitalisation needs for Spanish banks, which it said could be as high as 100 billion euros.

An International Monetary Fund report due out on Monday is expected to show Spanish banks need at least 40 billion euros, the BBC reports.

It is the first of a number of reports for which the Spanish government is waiting before it decides how to recapitalise its banks.

Earlier, there was strong demand for Spanish bonds at an auction on Thursday, seen as a key test of the country's ability to raise funds.

However, it did have to pay a higher interest rate than before. The rate on the 10-year Spanish bonds was 6.044%, up from the 5.743% from the last auction in April.

Spain sold 2.1 billion euros in medium and long-term bonds.

Chancellor pledges stability in eurozone

German Chancellor Angela Merkel says Europe is ready to act to ensure stability in the eurozone.

In a television interview, Mrs Merkel said the eurozone was moving inevitably towards a political union requiring nations to cede more sovereignty, which would lead to more of a multi-speed Europe, with non-euro states in the slow lane, Reuters reports.

"I don't believe that there will be one single summit that will decide on a big bang," she told ARD.

"But what we have been doing for some time, and on which a working plan will certainly be presented in June, is to say we need more Europe."

"Whoever is in a currency union will have to move closer together. We have to be open to make it possible for everyone to participate. But we cannot stand still because some do not want to go with us."