Spaniards alarmed by the dire state of their banks are squirreling money abroad at the fastest rate since records began, figures showed on Thursday, and the credit ratings of eight regions were cut.
Spain is the next country in the firing line of the euro zone's debt crisis, with spendthrift regions and shaky banks threatening to blow a hole in state finances and pushing funding costs towards levels that signal the need for a bailout.
The European Commission gave new help on Wednesday, offering direct aid from a euro zone rescue fund to recapitalize Spanish banks and more time for Madrid to reduce its budget deficit.
That helped lower the risk premium investors demand to hold Spanish 10-year debt rather than the German benchmark on Thursday, but it remained close to the euro-era record, at 520 basis points.
Bank of Spain data showed a net 66.2 billion euros ($82.0 billion) was sent abroad in March, the most since records began in 1990. The figure compares to a 5.4 billion net entry of funds during the same month one year ago.
Spaniards are worried about the health of their banks, hit by their exposure to a 2008 property crash, and have been sending money to deposit accounts in stronger economies of northern Europe.
Spain's Economy Minister Luis de Guindos however said the data was more a reflection of the troubles of the banking sector to fund itself externally than deposits flying abroad.
The capital flight data predates the nationalization of Spain's fourth biggest lender Bankia in May when it became clear the bank could not handle losses from bad real estate investments, compounded by a recession.
Spain's centre-right government has contracted independent auditors to assess the health of its financial system in an effort to restore faith in its banks.
Spain must lay out its restructuring plans for Bankia to the European Commission (EC), a spokesman for the EU executive arm said on Thursday. He added that a domestic solution to the country's bank crisis would be better than a European rescue.
The government said on Wednesday it would finance a 23.5 billion euro rescue of the bank through the bank fund, FROB but senior debt bankers said that the syndicated bond market is currently closed for Spanish agencies.
REMOVING UNCERTAINTIES
The prospect that Spain might not be able to handle losses at its banks has pummeled shares and the euro, although both regained some stability on Thursday.
De Guindos said that the future of the euro would be at stake in the next few weeks in Spain and Italy, adding that the rumors that Spain was negotiating financial assistance with the International Monetary Fund were "complete nonsense."
"The battle of the euro is being fought right now in Spain and Italy," he said at an event in Sitges, in the north-eastern region of Catalonia.
He also said Germany should help correct imbalances in the euro zone created by a loose monetary policy over the last decade and by the non-respect by Berlin of the stability and growth pact in 2003.
"We need to correct decisions which favored Germany... Germany has to assume its part," he said, adding that decisions in this respect would be taken in the next few days.
The Spanish government also hopes to clear doubts on Friday about how it plans to ease financing problems among its 17 autonomous regions.
Treasury ministry sources said a mechanism to back the regions' debt would be agreed at the weekly cabinet meeting and figures showing they were on track to meet their spending cuts targets would be released.
Fitch Ratings downgraded eight regions on Thursday, warning that a failure from the government to adopt new measures would result in further ratings cuts.
Spain's Deputy Prime Minister Soraya Saenz de Santamaria was meeting U.S. Treasury Secretary Timothy Geithner and International Monetary Fund Director General Christine Lagarde in Washington on Thursday.
The deputy PM will outline Spain's measures to tackle its crisis during the meetings, which were scheduled before Spain's situation reached boiling point, a government spokesman said. ($1 = 0.8069 euros)
(This version of the story has been corrected in the fifth paragraph to say data was for March not last month)
(Writing by Julien Toyer; Editing by Diana Abdallah)
By Nigel Davies and Sonya Dowsett
FOREX-Euro hits 2-year low on Spain worries, Aussie weak - Reuters
* Euro hits 2-year low vs dollar
* Aussie hits 8-mth low as China official PMI disappoints
* Yen off highs, market becoming wary of intervention
* Japan finmin Azumi threatens action vs yen rise
SINGAPORE, June 1 (Reuters) - The euro hit a two-year low versus the dollar on Friday and could fall further in coming weeks, dogged by worries that Spain may need external aid to shore up its struggling banking sector and fix its public finances.
The euro's sell-off has gained steam this week as Spain's borrowing costs surged on worries it may need to issue more debt to recapitalise its banks, adding stress to markets already frayed by anxiety that Greece may exit the euro zone.
The heightened worries about Spain have been highlighted by a widening in the yield spread between Spanish 10-year government bonds and German Bunds to euro-era highs this week, and the euro has fallen almost in lock step with that move.
The euro fell to as low as $1.2324 on trading platform EBS at one point, its lowest level since July 2010. It later trimmed its losses and last fetched $1.2358, down 0.1 percent from late U.S. trade on Thursday.
"We're looking for $1.18 by the end of Q3, and at this rate, it could happen before that," said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.
"During this risk-off environment, the U.S. dollar is the only place to be," he added.
Earlier, both the euro and the Australian dollar dipped against the U.S. currency after data provided fresh evidence of a slowdown in China's economy.
The Australian dollar fell 0.3 percent to $0.9697. It touched an eight-month low of $0.9648 after China's official purchasing managers' index (PMI) fell to 50.4 in May. That was the weakest reading this year and was also below the market's expectations.
Risk aversion on the worries about Europe, coupled with concerns about a slowdown in China - Australia's main export market - have weighed on the Australian dollar over the past month.
YEN OFF HIGHS
On Thursday, the euro gained a brief lift after The Wall Street Journal said the International Monetary Fund was discussing a contingency plan for a rescue loan to bail out Spain's third largest bank.
The report, however, was specifically refuted by IMF Managing Director Christine Lagarde.
The euro may not get much respite even if Spain gets an international bailout, said Standard Chartered's Henderson.
"If Spain had to be bailed out, the market would instantly focus its attention on Italy. Current European Union and IMF resources cannot fund bailouts of both Spain and Italy," he said.
The euro edged up 0.2 percent against the yen to 96.97 yen , staying above an 11-1/2-year low of 96.48 yen struck the previous day.
Weighing on the yen were comments by Japanese Finance Minister Jun Azumi, who said Japan would act decisively against the yen's rise if excessive market moves continue.
The yen's broad surge this week including its rise to a 3-1/2-month high versus the dollar, are making market players wary about the potential for Japanese yen-selling intervention, traders say.
The dollar edged up 0.2 percent to 78.46 yen but still remained close to Thursday's low of 78.21 yen, the dollar's lowest level against the yen since mid-February.
A fall in the 10-year U.S. Treasury yield to a record low this week has cut the yield advantage of Treasuries over Japanese government bonds, and has helped drag the dollar lower against the yen.
Traders say the dollar could come under renewed pressure against the yen if U.S. jobs data due on Friday comes in weak. The data is expected to show U.S. employers created 150,000 jobs in May.
Friday also marks the start of direct trading in the Chinese yuan against the yen, a baby step toward raising the yuan's international role.
While banks have previously conducted direct trading in the yuan versus the yen with their customers, the initiative will allow banks to conduct direct yuan/yen trading with each other without having to go through the dollar, market players say.
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