European markets steadied today after a late rally sparked by hopes of action from European authorities to help struggling banks and ease the debt crisis.
Shares had again fallen earlier as talk of a possible Greek default gained pace. Greek Finance Minister Evangelos Venizelos was quoted by two newspapers as saying an orderly default with a 50% haircut for bondholders was one of three possible scenarios for resolving the heavily indebted euro zone nation's fiscal woes.
Venizelos described the reports in a statement as an unhelpful distraction from the central task of sticking to Greece's EU/IMF bailout programme.
European Central Bank governing council member Klaas Knot told a Dutch daily a Greek default could no longer be ruled out, the first ECB policymaker to speak openly of the prospect.
''It is one of the scenarios. I'm not saying that Greece will not go bankrupt," Dutch daily Het Financieele Dagblad quoted him as saying.
"All efforts are aimed at preventing this, but I am now less certain in excluding a bankruptcy than I was a few months ago," Knot said, adding that he wondered "whether the Greeks realise how serious the situation is".
More signs emerged today that European governments are working on recapitalising vulnerable banks, with France's top market regulator saying 15 to 20 banks needed extra capital, although no French ones "at this stage".
The European Commission said European banks had already received €420 billion in funds to help recapitalise since 2008 and were in much better shape than three years ago.
"The recapitalisation of European banks is something that is ongoing, it is something that is already happening," Commission spokesman Olivier Bailly told a regular briefing.
Greek newspaper Ta Nea said Venizelos had told Socialist politicians behind closed doors that the government's central scenario was to stick to austerity plans to receive a second €109 billion bail-out and avoid bankruptcy.
The alternatives were either an agreed restructuring of Greek debt with a 50% reduction in the face value of government bonds, or a disorderly default, he said.
Greek bank shares fell by 5% on the reports, prompting Venizelos to say in a statement: "All other discussions, rumours, comments, scenarios which are diverting our attention from this central target and Greece's political obligation do not help our common European task."
The European Union's top economic official, Olli Rehn, said in a speech in Washington that the EU was doing everything to avoid an uncontrolled default. He did not explicitly rule out an orderly restructuring of Greek debt, which many economists see as inevitable.
Venizelos was flying to Washington for weekend meetings of the International Monetary Fund and World Bank and is expected to discuss Greece's position with fellow finance ministers on the sidelines.
The government approved a raft of more draconian austerity measures this week, including putting 30,000 public employees on a path to redundancy, cutting pensions and raising taxes, in an effort to secure the next €8 billion loan instalment vital to avoid running out of money in mid-October.
Shares of several European banks have tumbled and funding costs have risen as investors worried about exposure to debt issued by Greece and other debt-heavy European countries.
Moody's downgrades Greek banks and Slovenia
Moody's credit rating agency issued two credit downgrades in the crisis-hit euro zone early this morning, marking down leading Greek banks by two notches and Slovenian debt by one notch.
The agency downgraded the main Greek banks by two notches, citing increased risks of losses on their holdings of Greek debt.
Moody's Investors Service also warned of an increased prospect that the Greek economy will worsen, and said that private holders of Greek debt, meaning banks, might suffer further losses.
It also downgraded the rating of Slovenia's sovereign debt by one notch, warning of an increased risk that the government might have to intervene again to support the banking system.
Moody's Investors Service cut Slovenia's rating from "Aa2" to "Aa3" and also placed the country's debt on negative outlook, meaning that it could cut the rating again after further analysis.
These downgrades, as the euro zone debt crisis worsens raising deep concerns about the strength of some banks, follow downgrades by Standard & Poor's of Italy this week, first downgrading Italian sovereign debt and then seven top Italian banks.
The Greek banks downgraded today were National Bank of Greece (NBG) bank, EFG Eurobank Ergasias, Alpha Bank, Piraeus Bank, the Agricultural Bank of Greece and Attica Bank. A subsidiary of French bank Credit Agricole called Emporiki bank, and a subsidiary of French bank SocGen called Geniki suffered less, and were attributed ratings of "B3" instead of "B1".
All of the ratings had been placed under review on July 25 for a possible downgrade.
The International Monetary Fund and now the European Commission say that some European banks need recapitalising, and many European bank shares have plunged recently on concerns about their holdings of eurozone debt and their ability to weather any new financial storm.
Moody's said in its comment on the Greek bank downgrades: "Moody's believes that private creditors may incur substantial economic losses on their GGB (Greek government bond) holdings beyond the terms of the current debt exchange."
That was a reference to an EU-IMF second rescue for Greece on July 21 under which private banks accepted a reduction in the amount Greece will repay on its debt.
Moody's also said its decision had been motivated by a recent fall in the value of Greek bonds held by these banks. It warned that there was a rising risk of "significant" further losses on these holdings.
It was also likely that the amount of doubtful loans on the books of these banks would rise with the crisis, particularly because new losses could emerge as a result of audits by the central bank and external experts, Moody's commented.
The agency also expressed concern about a fall of deposits managed by the banks and about the fragile nature of their sources of funding.
Regarding Slovenia, Moody's pointed to "increasing risk that the government may be called upon to provide additional support to the banking system. "The ongoing financial crisis has exposed vulnerabilities in the banking system's asset quality, capital adequacy and short-term external funding model,'' it said.
The agency also pointed to political uncertainty and risks for the enactment of budget and economic reforms to control debt. Slovenia's finance ministry issued a statement saying that "the (acting) government was not surprised by the downgrade since it had been warning for months over the consequences the rejection of the much needed structural reforms may have."
Moody's downgrades Portugal's Madeira Islands
Moody's ratings agency has downgraded Portugal's Madeira Islands after its regional government failed to report more than €1 billion in debts.
Moody's Investors Service said the two-notch cut to B3 from B1 was due to "the region's poor governance and management as well as its weak budget execution."
Last week's revelation of Madeira's hidden debts added to the pressure on Portugal, which needed a €78 billion bail-out earlier this year to spare it from bankruptcy.
The regional government's president, Alberto Joao Jardim, said today that Madeira's total debts are around €5 billion. He has ruled the island since 1978 and is seeking re-election next month.
The central government in Lisbon is drawing up a rescue package for Madeira.
