European Shares to Open Lower, Eyes on Italy Bond Auction

European shares were called to open lower on Thursday as weaker U.S. economic data and concern ahead of an Italian debt auction showed how little impact a bailout of the Spanish banking system at the weekend had had on the euro zone debt crisis.

European Union Flag
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European Union Flag

The FTSE was seen opening 8 points lower at 6135, the DAX was expected to open lower by 24 points at 5460 and the CAC 40 was seen lower by 8 points at 3022.

Late on Wednesday Moody’s Investors Servicesdowngraded Spain’s sovereign debt by three notches from A 3 to Baa3 - just above junk status. The rating agency also placed the country on review for a possible further downgrade.

The action, which followed a similar move by Fitch last week, came despite the 100 billion euro bailout package agreed on Saturday, with Moody’s actually citing those plans as a source of concern, alongside Spain’s limited access to financial markets and continued weakness in the country’s economy.

Moody’s also cut its credit rating for Cypriot sovereign debt by two notches to Ba3 from Ba1 citing rising risks of a Greek exit from the euro zone and an already strained economic position.

Meanwhile, Italy's borrowing costs were expected to rise sharplyat a bond auction on Thursday as investors, unconvinced by the bailout deal for Spain, turned their attention to the euro zone's third-largest economy.

Italy’s own economic reforms are showing signs of faltering while it is also trying to fend off market speculation that it may become the next country in the euro zone to need a bailout.

Italy will offer up to 4.5 billion euros in bonds at a smaller-than-average auction.

In an effort to try to contain the crisis France said it wants the European Central Bank to have a stronger role in overseeing banks in the single currency bloc as part of a package of urgent reforms to increase financial stability in Europe, sources told Reuters on Wednesday.

Those views were echoed by U.S. treasury secretary Timothy Geithner who said Europe should create a banking union, build a stronger bailout fund and spur growth soon to prevent its debt crisis from moving into a phase that could spell financial calamity for the rest of the global economy.

Meanwhile, French president Francois Hollande warned the Greek people in a Greek television interview that some countries within the euro zone would be willing to force Greece to leave if it did not keep to its international agreements.

In an interview with Mega TV, Hollande said he wanted Greece to remain in the single currency and would argue for the use of European structural funds to help it return to growth. He said Greek voters would decide what they wished for. His comments come just a couple of days before Greeks go to the polls for the second time in two months following inconclusive national elections on May 6.

In a potential sign of concerns that the second round of elections on June 17 will be equally inconclusive Greek citizens have been pulling their cash out of banks and stocking up with food .

Bankers said up to 800 million euros ($1 billion) were leaving major banks daily and retailers said some of the money was being used to buy pasta and canned goods, as fears of returning to the drachma were fanned by opinion polls that suggested Alexi Tsipras, leader of the leftist coalition Syriza may win the election.

Underscoring the scale of crisis in Greece, French bank Credit Agricole is considering walking away from its Greek Emporiki Bank unit and letting it fail if Greece leaves the euro zone, the Wall Street Journal reported on Wednesday, citing a person with direct knowledge of the bank's plans.

JPMorgan Chase, Chief Executive Jamie Dimon used his much anticipated appearance before the U.S. Congress to apologize for the bank's multibillion-dollar trading loss but he also made clear he will still criticize how Washington tries to curb Wall StreetIn an interview with CNBC after his appearance in the Capitol he said the bank had much work still to do.

"We're going to wrestle it down, we're going to confess our sins, we're going to move on and hopefully we're not going to take our eye off the ball, which is (to) run our business," he said.

British finance minister George Osborne will announce plans for a wide ranging overhaul of the UK banking sector on Thursday evening and urge Europe to fix its finances to help drag the UK out of its second recession in four years.

In his annual Mansion House policy speech to the City, Osborne is expected to defend his deficit-cutting plans and argue it has created some room for other policy levers to help revive the economy.

And British prime minister David Cameron will face questionsat the judicial inquiry into media standards and ethics with about accusations earlier in the week that his government tailored policy to in line with media mogul Rupert Murdoch's business interests.

Cameron will be giving testimony for seven hours on Thursday starting at 11:00 a.m.(CET).