Greek, Spanish crises deepen; markets await summit
Spain's banks fell deeper into a loans crisis and Greece tottered closer to bankruptcy on Friday as markets swung wildly ahead of a Camp David summit to prevent a eurozone catastrophe.
Infected by a sense of crisis rippling from Athens across the eurozone, volatile trading gripped Spain's markets, with its most troubled bank, Bankia, leaping more than 25 percent just one day after plummeting.
Spanish banks reported that doubtful loans had climbed to 147.968 billion euros ($188 billion) in March, equal to an 18-year record 8.37 percent of the total, central bank data showed.
But only hours after Moody's Investors Service announced a severe downgrade of 16 Spanish banks by one to three notches, citing a recession and the state's reduced creditworthiness, Spain's bank stocks soared.
Bankia, subject to rumours of a bank run the day before, and nationalised only last week to salvage a balance sheet heavily exposed to Spain's collapsed property sector, leapt 25.88 percent by late morning.
Formed in 2010 from a merger of seven savings banks, Bankia alone had problematic property assets amounting to 31.8 billion euros at the end of last year, Bank of Spain figures show.
"Investors are now starting to believe that the more money some of the peripheral states have to pour into the banks, the more likely it is that the states themselves will need a bailout," said Capital Spreads analyst Angus Campbell.
"Spain is a case in point," he said in a report.
Pablo del Barrio, analyst at Spanish brokerage XTB, said Bankia stock had been subject to speculation in past days and investors may now be anticipating a government clampdown to stop short-selling.
But "Greece is the reason for all of this," Del Barrio said.
Germany tried to shore up confidence.
"We currently have no reason to doubt ... that Spain will manage to overcome the crisis with its own means," finance ministry spokeswoman Silke Bruns told a news conference in Berlin.
Greek voters rejected painful spending cuts in a deadlocked May 6 poll and they are expected to do so again in a June 17 election.
Such as result would cast in grave doubt its latest EU-IMF bailout package worth 240 billion euros ($300 billion) and, officials have warned, could lead to its exit from the eurozone, with unknown consequences.
Fitch Ratings agency cited the prospect of another inconclusive election and Greece being forced out of the eurozone as it cut its rating on the country's debt to "CCC" or vulnerable to default on Thursday.
Del Barrio argued that the market storm could be calmed by measures to prevent investor speculation and by strong European Central Bank action to increase liquidity.
US President Barack Obama is to raise actions Europe could take on its debt crisis at a Group of Eight summit in Camp David starting Friday, as Washington seeks more growth-oriented policies.
"People are waiting for weekend's G8 meeting -- to see if we can extract from it some kind of strong action by the central banks, and especially the European Central Bank," Del Barrio said.
"We have entered into a negative dynamic and one way of braking it is with this type of action - banning speculation and an injection of liquidity by the European Central Bank would help a lot to soothe concerns," he said.
A caretaker government took office in Athens on Thursday to organise its second election in six weeks.
The International Monetary Fund said it would hold off on official contacts with Greece until after the elections.
The IMF, which along with the EU is all that stand between Greece and a disorderly default, has warned that no new funds will be released without progress on pledged reforms.
The suspension of contacts effectively delays a review due to have begun soon on which the release of $1.6 billion by the IMF from the beginning of June was dependent.
But in a videoconference held Thursday evening the leaders of Britain, Germany, France, Italy and senior EU officials sought to address an emerging split that threatened to paralyse European policymaking.
"There was a high degree of agreement that fiscal consolidation and growth are not mutually exclusive but that both are needed," a spokesman for German Chancellor Angela Merkel said in an email.
New French President Francois Hollande was elected on a promise to negotiate the new EU fiscal pact to include growth measures, with Finance Minister Pierre Moscovici warning Thursday it would not ratify the treaty unless the issue is addressed.
Merkel, the leading proponent of the fiscal pact, has said cutting budget deficits is a necessary precondition for long-term growth.
British Prime Minister David Cameron had earlier called for eurozone leaders to take decisive action or face the break up of the single currency.
© 2012 AFP