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Markets React Badly To Spanish Bailout Plan

(c) Sky News 2012

Spain's borrowing rates have shot to their highest since it joined the euro after 18 banks had their credit ratings downgraded by the Fitch ratings agency.

Spain's 10-year bond yield rose to hit 6.81% in late afternoon trading according to data provider FactSet, while stocks began to dip just before markets closed, indicating that investors continued to be unconvinced by Spain's decision to seek help for its ailing bank sector.

Spain agreed last weekend to take a European bailout for its domestic banks, tapping into a �?�100bn (£80bn) euro area bailout fund, but investors are worried it will not solve the country's problem as the government may have trouble paying the money back.

Fitch said in a statement that its downgrade of the banks was a result of a previous downgrade of the Spanish sovereign debt on June 7.

Fitch said it had conducted stress tests, both on the Spanish banking sector as a whole and on individual banks, updating results from tests done in 2011.

The ratings agency said the weakness of the Spanish economy would continue to have a negative effect on business volumes "which, together with low interest rates, will place pressure on revenues".

The rescue package for Spain's crippled lenders was announced on Saturday by finance ministers from the 17-country euro area, but the exact amount the country's banks will receive has not yet been revealed.

Meanwhile, the World Bank, the body responsible for international economic development, has warned that the events unfolding in Greece and Spain are affecting the entire global economy.

There has been a staggering drop in financial activity, as flows from rich countries to the developing world dropped by 44% between April and May.

However, it still expects global GDP to rise by 2.5% this year and growth in developing countries should expand by more than 5%.

Speaking on Jeff Randall Live, Andrew Burns, lead author of the World Bank's Global Economic Prospects report, said: "If there is a significant deterioration in Europe (Chicago Options: ^REURUSD - news) , then we could see all developing countries get hit hard, and growth declining by as much as 4%."

But he added: "They are more resilient and aren't burdened by some of the structuring difficulties which we see in high income Europe, so we would expect them to respond more quickly."