Spain falls into recession amid fears of eurozone bank run

MADRID – Spain tumbled into recession and European stock markets and the euro fell Thursday as Greece installed a crisis government to tackle its crippling debt, EU leaders prepared for talks and analysts raised the spectre of a run on eurozone banks.

“Markets are worried about eurozone bank deposit runs and an escalating banking crisis,” London-based VTB Capital economist Neil MacKinnon told Agence France-Presse.

Heavy withdrawals of deposits have been reported in Greece and Spain, and top European Union leaders were to hold a videoconference later in the day.

They were initially to discuss an upcoming G8 meeting of industrialised countries but were now faced with a serious deterioration of the situations in Greece and elsewhere across the eurozone.

A caretaker government took office in Athens on Thursday to organise its second election in six weeks after an inconclusive May 6 vote as fears over its possible euro exit rocked Spain and Italy.

The election left Greece in limbo and the new poll on June 17 offers no guarantee of a viable government able to implement an EU-IMF bailout which has divided the country.

Meanwhile, Europe’s single currency nosedived to a four-month low at $1.2667.

“Confidence in European equities [is] quickly depleting, this time after the European Central Bank admitted it had stopped providing liquidity to some Greek banks,” noted analyst Craig Erlam at trading group Alpari.

The ECB said Wednesday that it was no longer dealing with some Greek banks via the conventional credit window, Dow Jones Newswires reported, and has restricted the banks to “emergency lending assistance” from Greece’s central bank that must be approved from month to month.

“Add this to the long list of other eurozone problems and investors are finding it very difficult to justify taking on the additional risk associated with the eurozone,” Erlam said.

British Prime Minister David Cameron was to discuss the crisis with German Chancellor Angela Merkel, new French President Francois Hollande, Italian Prime Minister Mario Monti and top EU officials.

Their videoconference was originally called to discuss a G8 meeting in the United States at the weekend, but Cameron’s office acknowledged that the eurozone was likely to come up as well.

On Thursday, Cameron renewed his call for eurozone leaders to take decisive action or face the break-up of the single currency.

Britain is not a eurozone member but the bloc is a key trading partner and fallout from the debt crisis is having a serious effect on the entire 27-member European Union.

“Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone.

“Or we are in uncharted territory which carries huge risks for everybody,” Cameron warned.

Those risks were underscored in Madrid, where the national statistics institute INE said the fourth biggest eurozone economy had contracted by 0.3 percent in the first quarter of 2012.

That was the same decline seen in the last three months of 2011 and confirmed that Spain was officially in recession, defined as two straight quarters of economic contraction.

Italy, the third biggest eurozone economy, is also in recession, while number two France has only narrowly escaped a similar fate.

The Spanish government paid higher rates to place three- and four-year bonds with wary investors Thursday, while a state-controlled bank, Bankia, was reportedly hit by heavy withdrawals by clients, a dire situation seen also in Greece this week.

Germany’s benchmark 10-year bond saw its own rate reach a new record low of 1.420 percent as investors fled to financial safe-havens.

Shares in Bankia, which was created in 2010 from a merger of seven savings banks, dropped by 9.79 percent to 1.493 euros in afternoon trading, while the Ibex-35 index of leading shares was off by 1.59 percent overall.

The daily newspaper El Mundo reported that Bankia managers told the board the bank had lost a “similar amount” of deposits this week as the 1.16 billion euros ($1.5 billion) withdrawn by clients in the first quarter of the year.

European stocks markets were rocked by the heightened tension, and fell in afternoon trading, with banking issues taking some of the heaviest losses.

London’s benchmark FTSE 100 index was off by 1.38 percent at 5,330.45 points.

“Fears of a Greek exit from the eurozone continue to linger, despite insistence from European politicians and bureaucrats that there are no plans for the country to leave,” said GFT analyst Fawad Razaqzada.

France’s new finance minister, Pierre Moscovici, reiterated support for Greece, telling BFMTV: “The eurozone is a unified zone, it cannot break up.”

In Italy, Prime Minister Mario Monti gave his full backing to the tax agency Equitalia, which has become a target for militant attacks and a focus for growing public anger against austerity.

Italian authorities have beefed up security for magistrates and business leaders and deployed military personnel to strategic locations in response to the threat, reminiscent of political militancy attacks in the 1970s and 1980s.

Monti met with agency managers in Rome to assure them of his “unconditional support and that of my government against numerous acts of intimidation and aggression.”