EU to act as Spain downgraded: Merkel

German chancellor Angela Merkel said Europe was ready to act to ensure stability in the euro zone as Spain’s credit rating was cut by three notches amid expectations it may soon seek EU help for banks beset by bad debts

Written by Reuters | Madrid,berlin | Published:June 8, 2012 1:13 am

German chancellor Angela Merkel said Europe was ready to act to ensure stability in the euro zone as Spain’s credit rating was cut by three notches on Thursday amid expectations it may soon seek EU help for banks beset by bad debts.

Spanish Prime Minister Mariano Rajoy said he would wait for the results of independent audits of the banking system before talking with Europe about how to recapitalise troubled lenders.

An International Monetary Fund report due out next Monday is expected to show Spanish banks need at least 40 billion euros,financial sector sources said.

Without waiting for a widely expected EU rescue,Fitch cut Spain’s sovereign rating to BBB from A with a negative outlook,saying Madrid was especially vulnerable to a worsening of the euro zone debt crisis.

Fitch estimated Spanish lenders need 50 to 60 billion euros in capital under their updated base case. However,the total fiscal cost to underpin the banks could rise as high as 100 billion euros or 9 per cent of GDP in a more extreme scenario similar to Ireland’s bank meltdown,it said.

Speaking after talks in Berlin with British Prime Minister David Cameron,Merkel said Germany stood ready,alongside the other 16 euro zone countries,to do whatever was necessary.

“It is important to stress again that we have created the instruments for support in the euro zone and that Germany is ready to use these instruments whenever it may prove necessary,” she said,referring to the euro zone’s temporary bailout fund,the EFSF,and the ESM.

If Spain does decide to seek help with recapitalising its banks,laden with bad property debts and other underperforming loans,it is expected to ask for funds from the 440 billion euro EFSF or the 500 billion euro ESM.

Shockwaves

Fitch cut its rating on Spain’s debt by three notches to BBB and signalled it could lower it further by putting the country on negative outlook

China delivered twin surprises on interest rates,cutting borrowing costs while giving banks additional flexibility to set competitive lending and deposit rates

Federal Reserve Chairman Ben Bernanke said the US central bank was ready to shield the economy if financial troubles mount,but offered few hints that further monetary stimulus was imminent

The EC is pressing Greece to wind down certain banks,possibly including its fifth-largest lender ATEbank,EU sources told Reuters

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