MADRID: Financial market euphoria over an EU bailout for Spain's troubled banks faded yesterday as investors sounded the alarm over its impact on public debt and worried whether Greek elections will deepen the euro zone crisis.
Madrid insisted it would stick to its borrowing plans this year after the European Union agreed to the bailout of up to 100 billion euros ($125bn), which is aimed at rescuing banks battered by a property market collapse and recession rather than helping the Spanish state finance its budget deficit.
But yields on Spanish government debt rose as Saturday's deal failed to calm concerns that Madrid may end up locked out of funding markets like the three other euro zone countries already forced into bailouts - Greece, Ireland and Portugal.
EU officials said they had discussed limiting the size of withdrawals from cash machines, imposing border checks and introducing capital controls as a worst-case scenario should Athens leave the bloc.
Underlining how problems in one euro state can rapidly spread to others, Cyprus strongly hinted yesterday it may become the fifth member of the bloc to apply for an international bailout before the end of this month to help its banks, which are heavily exposed to Greece.
Meanwhile, Fitch Ratings cut the long-term credit ratings for Spanish banks Banco Santander and Banco Bilbao Vizcaya Argentaria to BBB-plus from A, following Fitch's three-notch cut to the country's sovereign rating last week.
The ratings on both Santander, the euro zone's largest bank, and BBVA now carry a negative outlook, Fitch said.
The downgrades reflect worries similar to those affecting the sovereign rating, including expectations that Spain will remain in recession through 2013, the statement said.
Angela Merkel's government was forced to defend an EU rescue for Spain's indebted banks yesterday, with many Germans convinced their generosity is being abused. Aides to the German chancellor justified the huge bailout on the grounds that the Spanish economy was not in such dire shape that it required the kind of terms imposed on Greece, and the aid would not be paid directly to Spanish banks but to the government.