• Spain needs around €40bn to prop up its debt-laden banks
  • Long-term plans for eurozone unlikely to address imminent Spanish crisis
  • FTSE and German DAX both rise ahead of meeting of the ECB
  • Tory MP says Greece must leave euro to avoid a catastrophe

By Daily Mail Reporter

PUBLISHED: 07:41 EST, 5 June 2012 | UPDATED: 09:14 EST, 6 June 2012

Seven German banks have been downgraded by one of the most reputable rating agencies amid fears that eurozone debt will hit the country.

Moody's said it would be cutting the rating of Germany's second biggest bank, Commerzbank AG, from A2 to A3 for the long term with a negative outlook.

Moody's said its move was driven in part by 'the increased risk of further shocks emanating from the euro area debt crisis in combination with the banks' limited loss-absorption capacity.'

Despite the downgrading of the banks, world markets rose, buoyed by the prospect of action from the European Central Bank which is due to meet tomorrow to discuss the crisis.

Germany's DAX rose 1.68 per cent while the FTSE was up 1.93 per cent at 5361.84 this afternoon.

Commerzbank AG, Germany's second biggest bank, has had its rating downgraded by Moody's from A2 to A3

Commerzbank AG, Germany's second biggest bank, has had its rating downgraded by Moody's from A2 to A3

Spain's treasury minister Cristobal Montoro (left) said markets' doors were closed to Spain while Prime Minister Mariano Rajoy (right) said Europe 'needs to support those that are in difficulty'

The ECB isn't likely to take any new steps that will address immediate concerns when it meets, analysts say, even as anxiety builds over the deteriorating outlook for Europe's economy and banking system.

Indeed Herman van Rompuy, European Council president, will detail long term plans for eurozone integration that are not intended to deal with Spain's crisis as it asks for help.

Spanish Treasury minister Cristobal Montoro has said high borrowing costs mean that Spain 'doesn't have market doors open' to it as he begs for more money to help its debt-laden banks.

The request for aid comes as the European Union unveiled plans to stop taxpayers' money from being used to bail out failed banks.

Elsewhere the UK's treasury committee chairman, Andrew Tyrie, has also said that Greece should leave the euro.

He believes that the ECB cannot solve problems facing the country and plans need to be made for an orderly exit.

If Greek voters don't vote for austerity measures Greece could be kicked out of the eurozone causing chaos.

He said that a contingency plan should be made to make Greece leave or face a 'catastrophic' exit.

He added that a bailout for Spain would now be impossible, and the amount of money needed to prop up its troubled banking sector is estimated to be around €40bn.

He did not explain why a rescue would be impossible, but many analysts fear the size of the economy would stretch the resources of existing European rescue mechanisms.

Spain's economy represents 12 per cent of the eurozone's output - twice that of Ireland, Portugal and Greece combined.

The appeal from Europe’s fourth largest economy came as the G7 group of leading nations held crisis talks.

Spain, the fourth biggest economy in the eurozone, is set to put €2bn of bonds up for auction tomorrow, considered to be a key test for the country.

Mr Montoro urged the European Union to help  recapitalise its debt-laden banks.

'The risk premium says Spain doesn’t have the market door open and that we have a problem in accessing markets when we need to refinance our debt,' he said.

There will be some relief for taxpayers when the European Commission unveils its proposals to make bank shareholders and creditors shoulder the burden of losses rather than taxpayers.

Cash injection: Santander chairman Emilio Botin says a relatively small figure of 32billion would be enough to prop up Spain's ailing smaller banks

Cash injection: Santander chairman Emilio Botin says a relatively small figure of 32billion would be enough to prop up Spain's ailing smaller banks

It is hoped that this will prevent a run on the banks which could pull the entire system down. Spain's prime minister Mariano Rajoy echoed Mr Montoro's comments adding that Europe 'needs to support those that are in difficulty.'

He said: 'The most urgent and important thing is we have a problem of financing, of liquidity and of debt sustainability.'

Herman van Rompuy, European Council president, will detail long term plans for eurozone integration that are not intended to deal with Spain's crisis

Herman van Rompuy, European Council president, will detail long term plans for eurozone integration that are not intended to deal with Spain's crisis

A G7 source said Germany was pushing Spain to end its resistance to a rescue from the eurozone’s bailout fund.

Spain has been trying to gain direct aid without having to submit to the political humiliation of an assistance programme.

Meanwhile David Cameron will hold talks on Europe’s debt crisis with German Chancellor Angela Merkel in Berlin this week.

The chairman of Spain's largest bank said yesterday that the European Union could solve his country's financial problems by contributing 32billion to some of its most troubled banks.

The comments come ahead of a telephone conference between the finance chiefs of the G7 group of industrialised nations, which fear that Europe's failure to get to grip with its worsening financial position will drag on global recovery.

Emilio Botin, of Santander, said the prospect of a bailout for the nation's government would be 'bad for Spain', insisting instead on an injection of €40billion to such banks as Bankia, Catalunya Caixa and others.

The Spanish government has been trying to come up with a plan to recapitalise Bankia, the country's third-largest bank, after its management requested 15.4 billion from the government in May.

The cost of international bailouts so far amount is 69billion for Ireland, 63billion for Portugal and 236billion for Greece, leading to deep worries about the price of a Spanish lifeline.

Mr Montoro said Prime Minister Mariano Rajoy's government, which took power in December after a landslide election win over the previous Socialist administration, had a mandate to reform.

EURO CRISIS POURS COLD WATER ON WORLD MARKET

Evidence that Europe's debt crisis is continuing to drag down world economies pushed stock markets lower today, ahead of the G7 conference call about the crisis.

U.S. officials have said Washington expects more action to strengthen the European banking system in the next two weeks before a meeting of the Group of 20 major economies in Los Cabos, Mexico, later this month.

Germany's DAX retreated one per cent to 5.922, while France's CAC-40 rose 0.4 per cent to 2,967. Markets in London were closed for a second day for the Queen's Jubilee celebrations.

The euro fell back 0.6 per cent to $1.2429.

U.S. markets also looked set to open lower. S&P futures fell 0.2 per cent to 1,271, while Dow futures edged down 0.03 per cent to 12,059.

Earlier in Asia, stock markets rose following a move by Chinese authorities to boost consumption.

Japan's Nikkei 225 index rose one per cent to 8,382 after suffering sharp losses the day before. Hong Kong's Hang Seng added 0.4 per cent to 18,259.03, and South Korea's Kospi gained 1.1 per cent.

He said: 'We had the vote of Spaniards and that is the task they gave us. We understand that our future is in Europe, in the euro. And we should clearly bank on the institutions taking decisions.'

Mr Montoro's comments seemed to chime with Mr Botin's, with the finance minister agreeing that an EU-established banking union would allow ailing lenders to seek help without governments intervening.

Mr Montoro declined to set a figure of how much money the sector would need to cover toxic loans and mortgages, but said the question was where the money would come from - and insisted the EU must make progress on banking unity measures.

As bond markets charge exorbitant rates to lend to Spain, investors fear Madrid may be forced to seek external aid to finance a bailout of the bad loan-ridden financial system.

A report for clients by HSBC has calculated that over three years the costs of a bailout for Spain would be 365billion, of which 80billion would go towards the banks.

While analysts have priced a banking rescue at between 50billion and 160billion, Mr Montoro said the sum required to recapitalise the financial sector '...is not a very high figure, it is not an excessive figure'.

No cut is expected later today in the ECB's benchmark interest rate, which is already at a record low of 1 per cent. And there's little prospect that it will serve up more cheap emergency loans for shaky banks anytime soon. It handed out €1 trillion in such loans in December and February.

Analysts say the ECB has a strong motive for staying put until it sees some movement from governments.

'The ECB looks tired of being the eurozone's fire brigade and seems to have a preference for staying on hold,' Carsten Brzeski, an analyst at ING in Brussels, wrote in a note to investors. 'It looks like the ECB will want to keep the pressure as high as possible to tackle political complacency.'


Here's what other readers have said. Why not add your thoughts, or debate this issue live on our message boards.

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I bet bully-boy Barosso will be expecting the UK to help out first, which we will, albeit grudgingly.

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MOODY,S STANDARD AND POORS FITCH,they all got it wrong in 2007/8 What are these companies for.. they said that the american sub prime movements were AAA ...who pays them for these announcments and also who gives them the Information the only people to benefit are the financial Mafia of Hedge funds and they will destroy any country just to make a profit..... the other thing is who are all these countries borrowing off and where did they get their money from in the first placeif all these countries defaulted and then start afresh that will kick these robber barons in their pocket and maybe start the world on a sane recovery

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If you borrow say $5billion at interest when you have nothing. Then repayment comes and you can only afford to pay back 6billion, when you owe 7.5 billion to the bank. After that you need to borrow again, but as costs go up so must the loan - so you borrow 7billion, oweing 10billion, but can only pay 8billion back... and it goes round and round and round... until you owe 40billion in interest alone. Plus you want more to keep running, at interest. I don't understand how we can pay it all off? - Suki Tin, Homeland, 6/6/2012 14:11. >>>You can't. All money created under the current system comes about as a result of loans being made. Money is created the moment a loan is taken out. No extra money is created to pay off the interest. Interest comes from the SAME pool of money as the loans. In brief, there is never enough money created to pay back both principal and interest and some people will lose. Whether this is intentional or not is debatable. Welcome to the debt slave machine..

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there would be far greater economic stability if they were given some choice words ie SHUT UP - ralph, france, 06/6/2012 13:34 Someone has to speak up. You are sleep walking into a crisis of epic proportions. You still do not get it. This kick up the backside is long overdue!

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I have had a most horrible thought...................as yet we have not been downgraded does that mean we alone will bail out the whole of the EU?

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We are all living in a fools paradise---------If continental property is too high-----What about ours?

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Yesterday, they said Spain's economy was stable. Now they say they need help. With fibs like this, how can the world's money trust them ? Be brave and come clean on the actual economic situation and, maybe, just maybe, they might earn back the trust they so lack now.

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@ antipolitician: "Maybe the Germans won't be so smug now". Work hard, save prudently, don't experience a real estate bubble, invest in education and training, manufacture high-quality products, see the Deutschmark taken away from you (without a referendum, of course) - and then be accused of smugness. Strange logic.

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An Ode for Mrs Merkel: Oh Mrs Merkel whatever can you do, Moody's have made a decision to Downgrade your Bank's too, How long will it be for you to get control of Europe now, Especially as your Bank's are also likely to fail, You promised Euro security for all of the Union Members But it looks like it will end in Fire, Smoke and Embers.

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What i would like to know is Where has all this money the banks have lost gone?? - Gordon , Belmont, 5/6/2012 16:41. Gordon, I agree 100% with you. It`s something nobody ever seems able to tell us. Many times, over the last 4 yrs, I`ve asked people who OUGHT to know, & on the rare occasions that these 'super-intelligent' people are courteous enough to reply, the reply has always been so convoluted & unintelligable that a person not holding an honours degree in Economics doesn`t have a hope of grasping what they`re talking about. Nethertheless, the money MUST be somewhere........The money went into investing in unnecessary building projects, in loans to people to buy buidlings and homes they couldn't afford and in loans to Countries to prop up social welfare and pension payments (the asset side of banks balance sheets). All these uses is the equivalen of making a bonfire of credit balances on the liabilities side of the balance sheet of banks. The balance sheets collapse ;-)

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