European markets drop in response to economic worries

Europe’s economic woes escalated Friday as fears mounted over troubled Spanish banks and the credit rating agency Fitch further downgraded Greece’s debt, citing heightened worries that the country might be forced to abandon the euro.

Concern was focused on Madrid a day after a dramatic sell-off of troubled Bankia, one of Spain’s biggest banks. Rumors of a quickened pace in depositor withdrawals — denied by officials — were fueling investor fear. Underscoring the mounting concern over Spain’s financial system, Moody’s issued sweeping downgrades Thursday for 16 Spanish banks.

On Friday, key European stock indexes were mostly down in late afternoon trading, erasing a rebound from a low opening. Key indexes in Frankfurt, Paris and London had dipped, with the FTSE 100 down 1 percent. Spain’s IBEX, however, had rebounded slightly.

The euro touched a five-month low against the dollar early Friday but strengthened somewhat in later trading. Bankia, along with other hard-hit Spanish banking stocks, was rebounding and remaining steady.

Analysts have expressed concern that recession-plagued Spain, after spending an undisclosed sum in a partial nationalization of Bankia, might be reaching the critical point at which it would need to ask the European Union for a bailout. Spanish officials have denied such need, and have issued calls for calm.

On Thursday, Spain was forced to pay sharply higher interest rates to raise cash, paying 5.1 percent for debt maturing in April 2016, up from 3.37 percent last March. Though the sale actually went better than some analysts predicted, it nevertheless continued to raise fears that Madrid might be locked out of credit markets in the weeks ahead.

Howard Archer, chief European economist at IHS Global Insight in London, said markets are in a “fragile” mood and “it doesn’t take much bad news to trigger off a move downwards.” The headlines from across Europe in the past few days, including Thursday night's downgrading of Spanish banks, “highlight the fact that it isn’t just Greece,” he said. “Spain has major problems of its own. There’s a huge amount of uncertainty, and all news coming out at the moment is pretty bad.”

Moody’s sweeping Spanish downgrades — including the euro zone’s largest bank, Banco Santander — came as the agency saw a convergence of woes. Spain, the agency noted, is now mired in recession, stung by “the ongoing real estate crisis and persistent high levels of unemployment.” At the same time, the debt crisis has contributed to concerns over the banks’ access to cash and the ability of the Spanish government to prop them up.

Fitch also further downgraded the debt of troubled Greece to CCC from B-minus. The agency cited the “heightened risk” that Greece might not be able to stay in the euro after the strong showing of anti-austerity parties in the May 6 elections. That vote was inconclusive, leaving politicians here unable to form a government, and Greeks are now set to go back to the polls June 17.

One voter survey released Friday, however, suggested that Greeks might be swinging back toward supporting traditional parties more prepared to work with European officials on more modest changes to a bailout deal.

Special correspondent Karla Adam contributed to this report from London.

Anthony Faiola is The Post's Berlin bureau chief. Faiola joined the Post in 1994, since then reporting for the paper from six continents and serving as bureau chief in Tokyo, Buenos Aires, New York and London.
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