Eurozone banks hit by downgrades as Spain appeals for help

Spain has urged the European Union to help prop up its ailing and indebted banking system, with one government minister admitting that the country was being shut out of credit markets. It comes as a series of banks in two of the eurozone's strongest economies, Germany and Austria, suffered credit rating downgrades at the hands of Moody's because of the increased risk from the region's debt crisis.

Cristobal Montoro, the Spanish budget minister, said yesterday that "Europe should move quickly to allow its institutions to directly boost the capital of troubled banks in Spain". Speaking to the Onda Cero radio station, he added the amount needed – estimated at between €40bn and €90bn – "isn't very high, nor excessive". Rescuing the banks directly through the EU's bail-out fund rather than via the government would avoid adding to Spain's deficit. The country has seen its borrowing costs soar in recent weeks as investor confidence has drained, and Montoro admitted that "market doors are not open to Spain". The country, the eurozone's fourth largest economy, has consistently denied that it needs a full bail-out similar to those received by Greece, Ireland and Portugal.

Last night six German banks, including the country's second largest, Commerzbank, had their ratings cut by Moody's, which cited the "increased risk of further shocks emanating from the euro area debt crisis". The other affected banks were Dekabank, DZX Bank, Landesbank Baden-Wuerttemberg, Landesbank Hessen-Thueringen and Norddeutsche Landesbank. Moody's said the banks had a "limited capacity to absorb losses". A decision on the rating of Germany's biggest bank, Deutsche Bank, was delayed. Moody's also targeted Austria, which saw its three largest banks – Raiffeisen Bank International, UniCredit Bank Austria and Erste Group Bank – downgraded because of "their vulnerability to the adverse operating conditions in central and eastern Europe and the Commonwealth of Independent States", as well as the risks from the eurozone crisis.

With the focus of the crisis remaining on the eurozone's struggling banks, the European Commission presented plans today to avoid using taxpayers' money in future bail-outs of financial institutions. The aim of the legislation, which will enter force in 2014 at the earliest, is to make sure that losses are borne primarily by creditors and shareholders. The European Central Bank also held its monthly policy review today, and kept interest rates unchanged at 1 per cent, as predicted by the majority of economists.

Meanwhile, a report by Standard & Poor's estimated there was a one-in-three chance of Greece exiting the eurozone following elections on June 17. Leaving the single currency would "seriously damage Greece's economy and fiscal position in the medium term and most likely lead to another Greek sovereign default," the rating agency said. Yet, it added that the impact on other countries would be "less clear cut". The report said: "We believe that other sovereigns would be unlikely to follow any Greek exit, having witnessed the resulting economic hardships and long delay in harnessing benefits from national currency devaluation, and that in the meantime their European partners would provide additional support to discourage further departures."

The effect of a Greek exit would depend on the "robustness" of the response of European policy-makers, the ECB and the International Monetary Fund, said S&P. "We expect that a Greek exit would likely strengthen the resolve of other countries receiving external support to pursue reforms and avoid the economic consequences of an exit, and we consider it likely that the ECB would respond vigorously to any sustained rise in borrowing costs for other sovereigns. However, we believe the response of core eurozone member states is less predictable. Without appropriately sized and flexible financial mechanisms, the likelihood of a lasting restoration of confidence in major eurozone financial institutions over the near term is doubtful, especially at the periphery."

The downgrades were not confined to the eurozone. Another agency, Egan-Jones, cut the United Kingdom's credit score to AA- from AA, and assigned a negative outlook. In a statement Egan-Jones said: "The over-riding concern is whether the country will be able to continue to cut its deficit in the face of weaker economic conditions and a possible deterioration in the country's financial sector." The UK re-entered recession in the first quarter of this year, with gross domestic product contracting 0.3 per cent between January and February, following a similar decline at the end of 2011. "Unfortunately, we expect the UK's debt/GDP ratio will continue to rise and the country will remain pressed," said Egan-Jones, which also recently cut Spain and Italy' ratings.