Spain races to avert banking meltdown

08:43, May 31, 2010      

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One of Spain's biggest banks was negotiating a merger with five smaller rivals over the weekend as part of a desperate government attempt to restore confidence in the faltering economy, The Times reported Sunday.

According to the report, Caja Madrid, the country's second-largest savings bank, opened talks in hopes of beating the June 30 deadline to tap a 99-billion-euro ($121.7 billion) government bank rescue fund.

Just Friday, Fitch cut Spain's credit rating by one notch, sending markets lower and capping a horrible week for a government struggling to convince investors that it can solve its economic woes and avoid a Greek-style debt crisis.

Fitch Ratings linked the downgrade to the record levels of household and corporate debt in Spain, as well as mounting public debt, which it said would act as a drag on economic growth.

World equities slid and the euro fell below $1.23 after the downgrade, stoking fears that Spain, the eurozone's fourth-largest economy, could suffer a crisis similar to the one that forced Greece to agree a 110-billion-euro rescue with the EU and IMF earlier this month.

Because the Spanish economy is far bigger than Greece's, a crisis there would have far more serious implications for the eurozone and global growth.

"Spain is the 800-pound gorilla in the room," said Win Thin, a senior currency strategist at Brown Brothers Harriman in New York.

Fitch is the second agency to cut its rating on Spain after Standard &Poor's downgraded the country last month. In addition to the debt woes, Fitch cited the inflexibility of the labor market and the cost of restructuring Spain's network of unlisted savings banks.

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