FTSE takes £80bn hit as fears over Spain deepen euro crisis

The euphoria around the highly-anticipated Facebook flotation was not enough to lift traders in London last night, where the FTSE 100 Index closed more than one per cent lower at 5267.6.

The top flight has lost more than five per cent in one week, its biggest weekly fall since August and hitting its lowest level since November.

Uncertainty on the continent heightened after Moody’s Investor Service downgraded 16 Spanish lenders, including the UK arm of Banco Santander. Moody’s had qualified its decision to move the UK business to an A2 rating, one higher than the parent, saying that was appropriate given its “general funding independence”, the fact that it was “a systemically important bank in the UK” and that it had “no direct exposure to the Spanish government (or regional governments)”.

A spokesman for Santander UK moved to reassure customers further yesterday, stressing it was “completely autonomous” from its parent firm, adding that “money raised in the UK stays in the UK”.

And a joint statement yesterday from the Treasury, the Bank of England and the FSA said: “All UK banks are well capitalised and are regulated in the UK. Depositors in UK-regulated banks are fully protected up to £85,000 under the Financial Services Compensation Scheme.”

Spain is in the eye of the storm of the eurozone debt crisis amid worries its banks are overexposed to an imploded property bubble and the government, fighting recession and a jobless rate of nearly 25 per cent, could not afford to bail them out if it needed to.

The Bank of Spain reported that lenders’ and savings banks’ bad loan ratio had risen in March to 8.36 per cent from 8.15 per cent the previous month.

As Spain’s woes deepened, investors continued to be troubled by the political turmoil in Greece, where a caretaker government has stepped in to steer it into repeat elections on June 17.

The political turmoil has increased the likelihood that it could leave the 17-country monetary union, a move that could have ripple effects throughout Europe and the world’s financial markets.

Greece, which some fear will have to exit the euro if an anti-austerity party is elected in June, was also hit with a downgrade from ratings agency Fitch.

Giving it a rating of CCC, the lowest possible grade for a country that is not in default, it said the move was prompted by the “heightened risk” the political and economic crisis could drag the country out of the single currency.

Last night, Fitch also downgraded five Greek banks – giving CCC ratings to National Bank of Greece, Eurobank, Alpha, Piraeus and Agricultural Bank of Greece, all down from B-.

Michael Hewson, analyst at CMC Markets, said: “Concerns remain about the fragility of the banking system across Europe overall, as concerns grow about further downgrades if contagion ripples spread.”

Britain’s biggest banks took a battering on the markets with Barclays shedding three per cent, Lloyds dropping six per cent and RBS falling five per cent.

Moody’s debt downgrade came after the Spanish government was forced to deny there had been a run on the country’s fourth biggest lender, Bankia, amid reports one billion euros (£800m) had been withdrawn since it was nationalised last week.

Ministers in Madrid tried to reassure the markets by pledging an audit of the banking system but this failed to inspire much confidence.