Spain's banks have been told to find an extra €17bn (£14.5bn) to shore up their finances and prevent a collapse in confidence after ratings agency Moody's shocked the markets with a downgrade of the country's debt.
The Spanish units of Deutsche Bank and Barclays were among several banks to fail tests set by the Banco de España, Spain's central bank, with Barclays the worst hit by a demand to inject €552m to reach a core capital ratio of 8%.
The central bank said that both banks were committed to taking measures to cover their capital needs, but the markets took fright, concerned that Spain had underestimated the extent of bank debts, especially among the country's beleaguered cajas or regional savings banks.
The FTSE 100 index fell more than 90 points to end the day at 5845.29 while the spreads on Spanish and Portuguese debts, which determine the cost of financing the government's budget deficit, widened to all-time highs. The Portuguese parliament tonight rejected a vote of no confidence in the minority socialist government. The motion had been put forward in protest at the government's painful austerity drive, designed to ease the country's debt.
Moody's, which downgraded Spain to its third highest rating of Aa2, highlighted the cost of rescuing its banking sector as a particular concern. The ratings agency said the cost would be more than double the Banco de España estimate and would rise to more than €100bn under a rigorous stress test.
It said the government's recently announced acceleration of efforts to restructure the cajas was likely to strengthen the country's banking industry, but there remained "a meaningful risk" that the eventual cost of recapitalisation would be higher. Moody's now believes the rescue package will cost between €40bn and €50bn – more than twice its own earlier estimate of €17bn.
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