By Jason Gaywood, director at currency specialist HiFX

The seemingly endless outpouring of bad news coming from the EU was compounded late last night by the rating’s agencies when Moody’s downgraded the credit ratings of 16 Spanish Banks and Fitch downgraded Greece even further into Junk status warning it could be close to a ‘widespread default’ on both government and private-sector loans.

This comes hot on the heels of reports of widespread withdrawals from ATM’s across Spain and Greece in the last few days — estimates suggest that up to £2 billion has been removed from banks in the last three days. The danger now is that panic will set in as the population races to get their money out resulting in the self-fulfilling prophecy of ‘a run on the banks’.

We witnessed this situation here in the UK back in 2008 when people queued for hours to withdraw cash from the doomed Northern Rock. The difference now is that a large number of banks and nations are affected and the risk of ‘contagion’ is acute.

Spain is now a huge concern to the wider Eurozone - it is a much bigger economy than Greece, Portugal, Ireland or Italy and issues here threaten to spread like wild fire throughout Europe and beyond. The now downgraded Banks, already weakened by the burden of huge property debts which look unlikely to paid to the tune of as much as EUR170bln now face the added nightmare scenario of loosing the deposits in their vaults.

With borrowing costs in the wholesale markets ramping as the perceived [and probably very real] risk of lending to these institutions increases, the situation threatens to descend into an irretrievable spiral resulting in either bank collapse or mass bailouts being required by the ECB and IMF.

This simply cannot continue indefinitely and sooner or later either the money or the will to artificially support these institutions and sovereign nations alike will run out and one gets the feeling that it is now a matter of ‘when’ rather than ‘if’ we will witness the break up of the crippled Euro.

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