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Moody’s Downgrades Spanish Banks

  • Selah Hennessy

A man uses an ATM cash point machine at a branch of the Bankia bank in Madrid, May 18, 2012.

A man uses an ATM cash point machine at a branch of the Bankia bank in Madrid, May 18, 2012.

World stocks fell Friday, after the credit rating of more than a dozen Spanish banks was downgraded. The blow comes amid investor fears about the stability of the eurozone.

Residents on the streets of Spain’s capital, Madrid, seemed resigned to the downgrading. One resident said the measure should have happened a long time ago because the banks in Spain are not in a good position to secure deposits and accounts.

But residents say Spain is on the right track to resolve its banking problems.

Local resident Domingo Beltran says Spain has to clean up the banks and clean up the country. The measures the government is taking, he says, are designed to do just that.

Moody's Investors Service downgraded the credit rating of 16 Spanish banks late Thursday. It blamed the downgrade on Spain's renewed recession, unemployment and bad loans in the property industry.

Iain Begg from the European Institute at the London School of Economics says the markets fear the banks may need rescuing by their government.

"The risk for Spain as a country is that if there are too many toxic assets on the books of Spanish banks, then that can become a problem for the state in that the state would be expected to come to the rescue of the banking system in much the same way as it did in the United Kingdom and the U.S. after the Lehman Brothers episode," said Begg.

But with finances already stretched in Madrid, it is not clear that the government can afford a major rescue. That could mean a problem for the wider eurozone.

Some European nations like Greece that have been unable to meet their debts have been bailed out by their euro neighbors. In Greece, an election earlier this month turned out no clear winner and the country is set for a fresh vote next month. The favorite party to win the largest share of votes, a radical left group, wants to renegotiate the bailout deal made with the European Union and the International Monetary Fund, a position that could put Greece’s place within the eurozone at risk.

Begg says it is best for Greece and for Europe that the country stays within the single currency. But he says regardless, Europe is in the process of becoming a stronger rather than a weaker union.

"Europe has been making rather than breaking for much of the last few months because it has been gradually putting in place all kinds of systems for governing the euro area more effectively than it has in the past and resolving some of the potential problems," said Begg. "The trouble is that what it is designing is a system for normal times, and we are in abnormal times. The trick is to get through the abnormal times before the normal times can be restored."

Unemployment in Spain is nearing 25 percent. Among the young, it is reaching around 50 percent.
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