European shares were called to open lower on Friday, snapping a four-day rally, after Fitch ratings agency downgraded Spain’s sovereign debt by three notches to triple B, just above junk status, and the International Monetary Fund (IMF) was set to warn Spain’s banking system would need a bailout package worth 40 billion euros ($50 billion).
The FTSE was called to open 28 points lower at 5420, the DAX was seen opening 37 points lower at 6107 and the CAC 40 was expected to open 32 points lower at 3039. Meanwhile, Spain’s IBEX was expected to open 42 points lower at 6396.
Fitch signaled it could lower Spain’s credit rating still furtherby putting the country on negative outlook. The new rating was Spain's lowest among the three main ratings agencies. Fitch said in a statement that Spain was especially vulnerable to a worsening of the euro zone crisis due to a high level of net foreign indebtedness.
The ratings decision was a blow for the Spanish government which had earlier on Thursday seen strong demand for its sovereign debt on the capital markets despite Treasury Minister Cristobal Montoro warning on Monday that he feared Spain was on the verge of losing access to the markets.
Spain sold 2.1 billion euros worth of bonds, lthough yields were higher than in previous tenders.
Spanish Prime Minister Mariano Rajoy said on Thursday he would wait to see the results of independent audits of the country's banking system before talking with Europe over the best course of action to recapitalize the country’s banking system.
That followed news of an IMF reportdue to be published on Monday that was expected to show Spain would need to set aside an 40 billion euros to shore up its banks, according to Reuters sources.
The additional funds come on top of two previous provisioning efforts this year in which the Spanish government required local banks to set aside a total of more than 80 billion euros.
Meanwhile, Luis Maria Linde, an economist who first worked at the Bank of Spain in 1983, was named as its new governor, on Thursday. The 67-year-old was only appointed to the board of the central bank two weeks ago, fueling speculation that he was economy minister Luis de Guindos's favored candidate to take over.
Spain was the dominant topic of discussions between German Chancellor Angela Merkel and British Prime Minister David Cameron on Thursday.
While the turmoil in Spain dominated the headlines, Greece continued to limp its way toward a second general election on June 17 with the European Commission pressing the government to wind down certain banks, possibly including its fifth-largest lender ATEbank, sources told Reuters.
Although it is the responsibility of Greece's central bank to close a struggling lender, the EU's executive also has a say under state-aid rules, which allow it to refuse a request to rescue a bank if the Commission considers it too costly to save—effectively forcing the bank to be wound up.
Former Greek prime minister Lucas Papademos warned on Thursday that the fallout from a Greek exit from the euro area would be disastrous and its continued membership in the common-currency bloc must be pursued by the next government elected in the June 17 election.
Elsewhere, Fitch warned the U.S. it faces a sovereign rating downgrade next year if the White House and Congress fail to come to grips with the budget deficit and create a "credible" fiscal consolidation plan.
Federal Reserve chairman Ben Bernanke said on Thursday that the U.S. central bank was ready to shield the economy if financial troubles mount, but offered few hints that further monetary stimulus was imminent.
He told Congress the Fed was closely monitoring "significant risks" to the U.S. recovery from Europe's debt crisis but struck a decidedly different tone from the central bank's No. 2 official, Janet Yellen, who argued in favor of monetary support on Wednesday.
But highlighting the growing pressure for more monetary easing—or QE3 as it is likely to become known—Chicago Fed President Charles Evans told CNBC on Thursday that the Fed should ease policy more to encourage faster U.S. economic growth and guard against dangers from abroad, particularly the euro debt crisis.
"With all the risks that we're facing ...we're in a better situation the stronger the economy is, so that we can withstand whatever blows might be coming your way—or not—and that's why I think more accommodation would be good," Evans said on CNBC.
Asian shares edged lower on Friday, hurt by disappointment that Bernanke gave no clues on whether a U.S. easing was in the offing.
Bernanke’s silence on the issue also outweighed any positive effect from China’s cut in interest rates on Thursday. The central bank's cut of 0.25 percent, the first since the global financial crisis in late 2008, also raised concerns about what the deluge of Chinese data for May due this weekend may reveal.
Separately, Qatar's sovereign wealth fund lifted its stake in Xstrata to more than 10 percent, forging ahead with its recent spate of share-buying in European blue-chip companies.
And an Apple lawyer has said that company may seek a legal order to stop the launch of Samsung’s Galaxy S III phone in the U.S. later this month. At a hearing on Thursday in a San Jose, California federal court, Apple attorney Josh Krevitt said the company could file for a temporary restraining order against Samsung as early as Friday.