LONDON: World stock markets dropped and Spain's borrowing costs shattered euro-era records on Thursday after Moody's slashed the country's credit rating, heaping more pressure on the embattled eurozone.
European shares fell in morning deals after Asian markets closed mostly lower and Wall Street had retreated overnight. The euro dipped against the dollar in London.
Spain's borrowing costs reached new dangerous highs near 7.0 percent as a bailout loan of up to 100 billion euros (125 billion) to salvage the nation's stricken banks fell flat after a brief initial positive welcome.
"The rout in Spanish bonds continues relentlessly, as Madrid's borrowing costs move ever higher and ever closer to the dangerous seven percent level," said Chris Beauchamp, a market analyst at trading group IG Index.
In midday trade, London's FTSE 100 index of leading companies fell 0.60 percent to 5,451.11 points, Frankfurt's DAX 30 dropped 0.46 percent to 6,124.36 points and in Paris the CAC 40 lost 0.36 percent to 3,019.06.
Despite the trouble on the bonds markets Madrid's IBEX 35 stock index was up 0.36 percent, and Greek shares soared more than 6.0 percent on speculation that voters will elect a coalition Sunday that will adhere to the country's bailout deal and keep it in the euro.
In foreign exchange deals, the euro edged down to $1.2552 from $1.2556 late Wednesday in New York. The dollar fell to 79.32 yen from 79.46 yen.
The interest rate on Spanish 10-year government bonds soared to just under 7.0 percent to their highest since the birth of the single currency and were up sharply from 6.721 percent Wednesday.
Neil MacKinnon, an economist at financial group VTB Capital, said that a level of 7.0 percent was "considered by the markets to be a tipping point which eventually increases the prospect of a government bailout."
Italy also had to pay investors much higher rates of return Thursday, reflecting increasing concerns over the eurozone debt crisis, when it raised medium- and longer-term financing.
Such high rates are regarded by many analysts as impossible for Spain to afford to finance its activities over the longer term, raising the risk of a bigger bailout, as was the case for Greece, Ireland and Portugal.
"With crucial elections in Greece being less than three days away and periphery yields having spiked substantially to the upside since Spain agreed to outside help for their troubled banking sector last weekend, many would consider the current environment anything than ideal to stage bond auctions," said ETX Capital trader Markus Huber.
Moody Investors Service slashed Spain's sovereign debt rating by three notches late Wednesday to Baa3 and left it on review for a possible further downgrade.
Since many institutional investors are barred from buying bonds that are rated as junk, or non-investment grade, the prospect of a further downgrade sent a further chill through the market.
The borrowing "will materially worsen the government's debt position," Moody's said, projecting the country's public debt ratio to hit 90 percent of gross domestic product output this year and to continue rising through 2015.
Last week, Fitch also slashed Spain's rating by three notches but Standard and Poor's, while noting Madrid's difficulties, took no action, having cut its Spanish ratings by two notches in April.
Meanwhile in European company news, Nokia on Thursday said it planned to cut up to 10,000 jobs by the end of next year due to massive additional cost-savings measures at one of the world's biggest mobile phone makers.
In Asian trade, stock markets closed mostly down as dealers followed losses on Wall Street while selling pressure was also stoked by fears over Spain and nervousness ahead of the Greek polls at the weekend, traders said.
Tokyo dropped 0.22 percent, Sydney shed 0.53 percent and Hong Kong lost 1.15 percent.
The market focus was also on Sunday's election in Greece -- its second in six weeks -- with dealers fearing a victory for anti-austerity parties that could lead to Athens tearing up a bailout deal and a likely exit from the eurozone.
Yet investors in Athens were betting the other way -- that the polls will produce a government able to implement the controversial EU-IMF bailout, sending the market, led by bank shares, soaring 6.43 percent.
German Chancellor Angela Merkel on Thursday said that the eurozone crisis would dominate next week's G20 summit but warned world leaders that her powers to act were limited.
In a speech to lawmakers ahead of the meeting of G20 leaders in Los Cabos, Mexico on June 18-19, Merkel warned Europe could not take the easy way out with solutions based on "mediocrity" that failed to address core problems.
"All those looking to Germany again in these days in Los Cabos, who are expecting a drumroll and the answer ... I say to them Germany is strong, Germany is an engine of economic growth and a stability anchor in Europe," Merkel said.
"But Germany's powers are not unlimited," she said, cautioning against counting too much on Germany as the sole crisis fighter in Europe.
On Wall Street overnight, the Dow closed down 0.62 percent, the S&P 500 lost 0.70 percent and the Nasdaq slipped 0.86 percent after official data showed that US retail sales fell 0.2 percent from April. AGENCIES