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Spain stocks extend losing streak after downgrade

A woman uses an ATM cash point machine at a branch of the Bankia bank in Madrid Thursday May 17, 2012. A recently nationalized Spanish bank's shares plummeted Thursday after a newspaper said depositors were rushing to withdraw money, while the country paid sharply higher interest rates in a debt auction, reflecting concerns the country will be caught up in the fallout of the Greek crisis. Logo says ' Welcome to Bankia'. (AP Photo/Paul White)

MADRID (AP) -- Spain's stock market flirted with seven-year lows Friday as investors continued to worry about the stability of the eurozone's financial system in light of the downgrading by credit ratings agency Moody's of the country's banking industry.

Moody's acted late Thursday, citing Spanish banks' heavy load of non-performing loans amid a recession-plagued economy, their trouble raising financing on capital markets and the government's sovereign debt problems, which might make it hard for the government to come to the aid of banks, among other woes.

Indeed, the Bank of Spain reported Friday that banks' and savings banks' bad loan ratio had risen to 8.36 percent in March from 8.15 percent the previous month. The new figure is the highest in 18 years.

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

The country's Ibex 35 index was off more than 2 points shortly after trading began Friday. Banks were among the biggest losers. But both the index and bank stocks recovered later. Banco Santander, SA and Banco Bilbao Vizcaya Argentaria, SA were up about two points in mid-morning trading. Both were mentioned in the downgrade.

Shares in Bankia , SA, a recently nationalized bank that is heavily laden with toxic assets — shot back up 18 percent after losing almost that much Thursday in a session in which they had plummeted as much as 27 percent on a media report that depositors had withdrawn €1 billion in the week since the state took over.

The nervousness about Spain's banks comes as the eurozone financial crisis intensifies. Political turmoil in Greece 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.

Depositors have been pulling their funds out of Greek banks. People fear the country's financial sector might collapse if Greece left the eurozone and that their savings would become worthless if the country started using a substantially devalued new currency, such as the drachma.

Earlier this week, Moody's also downgraded the debt ratings of 26 Italian lenders as they struggled with the effect of the country's weak economy and government austerity measures.

Nuria Alvarez, a banking analyst with Madrid brokerage Renta4, said investors had factored in the downgrade in Spain because Moody's warned a few months ago that many European banks were up for review and could take a ratings downgrade. The rise in the big banks is no big deal, she said. "In a volatile market like this, a rise or fall of two points in one day is nothing," she said.

She cautioned however that the rise in the bad loan ratio, while moderate and the latest in a series of small increments, does not mean banks could get hit hard as Spain's recession bites deep and unemployment worsens.

On bond market the interest rate on 10-year bonds was down 10 basis points at 6.19.