PARIS: Europe’s economic crisis has deepened, with a slump in German confidence, worsening British recession and a debt-wracked Spain seeking French support in the face of soaring borrowing costs.
While fears grew Wednesday that Spain, the fourth largest Eurozone economy, is going to need a fresh bailout, storm clouds were also gathering over Europe’s top economy.
Data showed that business confidence in Germany dropped again in July as companies grow increasingly wary of fallout from the Eurozone debt turmoil.
The Ifo economic institute’s closely watched business climate index dropped to 103.3 points in July from 105.2 points in June, a slightly steeper decline than analysts expected. It was the third month in a row the index fell.
Later Wednesday, ratings agency Moody’s handed Berlin more bad news, downgrading the outlook for 17 German banks after a similar move against the government’s credit rating earlier this week.
Moody’s cut the outlook on a swathe of state-backed regional banks, known in Germany as landesbank, but also included IKB Deutsche Industriebank and Deutsche Postbank.
On Monday Moody’s cut Germany’s ratings outlook from “stable” to “negative”, citing exposure to European financial woes and the possible cost of future bailouts.
That was the first step toward stripping Germany of its coveted AAA credit rating — a stark warning that not even Europe’s largest economy is immune from the Eurozone’s rolling crisis.
Though not a member of the Eurozone, Britain is no disinterested bystander to the financial turmoil on the continent.
Britain’s economy shrank in the second quarter by more than expected, official data showed Wednesday, as a double-dip recession tightened its grip on the country on the eve of the costly London Olympics.
Britain’s gross domestic product (GDP) slumped 0.7 percent between April and June from the first three months of the year, on steep output declines in the construction and manufacturing sectors, the Office for National Statistics said.
But Spain is currently the main focus of financial firefighting in Europe.
After talks in Berlin Tuesday, Spanish Finance Minister Luis de Guindos met French counterpart Pierre Moscovici in Paris, as the Eurozone tries to contain fears that Spain may be heading for a full-blown bailout.
In Berlin, de Guindos and German Finance Minister Wolfgang Schaeuble had issued a joint statement saying Spain’s borrowing costs do not correspond to its economic strength or the “sustainability of its public debt”.
A German finance ministry spokesman denied Spain was seeking a new bailout, saying: “This is wrong, it is not on the agenda.”
The statement warned more downgrades could occur if there was a “further deterioration of the creditworthiness” of Germany’s central or regional governments.
Economists increasingly agree that a previous Eurozone bailout of up to 100 billion euros agreed for Spain’s banks will be insufficient to get the country through the crisis brought on by a collapse of its real estate boom in 2008.
One Spanish region, Valencia, has already requested help from the 18-billion-euro fund set up by the central government to rescue struggling regions, while another region, Catalonia, has indicated it may do the same.
Spain’s borrowing costs have hit their highest level since the country adopted the euro, with yields on 10-year government bonds hitting 7.621 percent Tuesday — the kind of level that forced Greece, Ireland and Portugal to seek EU-IMF bailouts.
But the yield eased on Wednesday to a still high 7.376 percent.
The euro meanwhile rose against the dollar on Wednesday amid hints of further steps to ease the European debt crisis and signs of more US stimulus.
The euro climbed 0.7 percent to $1.2151 in New York, a day after touching two-year lows.
The euro got some support when Austrian central bank governor Ewald Nowotny, a member of the European Central Bank (ECB) governing council, said that the future European Union 500-billion-euro ($600 billion) financial rescue fund might be granted a banking licence.
That would allow the fund to exchange bonds for ECB cash, bolstering its capacity without governments having to contribute additional funds.
Analysts said Spain needs either a bailout or market intervention by the European Central Bank to force its borrowing costs down by buying bonds.
The ECB has done this before but it is not clear if it is ready to step in again now without clear backing from the major Eurozone states, especially Germany.
The spotlight will also be on Italy on Thursday as it seeks to raise up to 2.5 billion euros in a two-year bond auction.
Meanwhile Greek Finance Minister Yannis Stournaras will meet head auditors from the EU, the IMF and the European Central Bank, whose ongoing inspection of government reforms will determine whether the country will receive pending loans.
European Commission president Jose Manuel Barroso meanwhile protested against efforts to cut the 2013 European budget, saying they undermined plans to promote growth and jobs.
In a letter to European heads of state and government, he lashed out at plans to cut the draft budget by five billion euros ($6.1 billion).