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E.U. Uh-Oh: As Spain Goes Into Recession, Bank Run Fears Grow

"Either Europe has a committed, stable, successful eurozone...Or we are in uncharted territory which carries huge risks for everybody."

MADRID (AP/The Blaze) -- A recently nationalized Spanish bank's shares plummeted Thursday after a newspaper said depositors were rushing to withdraw money, while the country paid sharply higher interest rates in a debt auction, reflecting concerns the country will be caught up in the fallout of the Greek crisis.

"Markets are worried about eurozone bank deposit runs and an escalating banking crisis," London-based VTB Capital economist Neil MacKinnon told AFP.

Shares in Bankia SA, a lender nationalized last week, plunged as much as 27 percent on a report in the newspaper El Mundo that customers have withdrawn more than (EURO)1 billion ($1.27 billion) since the state took it over a week ago. By midafternoon in Madrid, the shares had recovered somewhat to trade 11 percent lower at (EURO)1.47.

Spain's fourth-largest lender, Bankia insisted its depositors' money was safe, while the government denied there was a run on the bank.

In a statement, the company said deposit flows in and out of the bank in the first half of May were "essentially of a seasonal nature." It did not address the number given by El Mundo, nor would a bank official reached by phone.

The statement also noted that when the government nationalized Bankia on May 9, it established that the bank was solvent and said its depositors had nothing to worry about.

"It is not true that at this time a flight of deposits from Bankia is taking place," said Fernando Jimenez Latorre, the deputy economy minister, adding that the bank was big and "has enormous strength."

Since Bankia was created last July as the listed result of a merger of seven regional savings banks its share price has dropped nearly 70 percent. Its market capitalization is now lower than that of smaller Spanish banks.

The drop in Bankia's shares helped push the broader Ibex 35 stock index down about 1 percent on Thursday. Other banks also saw their share price fall with Banco Santander SA down 3 percent at one point, although it later recovered to 1.8.

The concerns about the financial sector augmented jitters about the broader country's financial future at a time when Greece's political chaos threatens to destabilize the entire European market.

"Confidence in European equities (is) quickly depleting, this time after the European Central Bank admitted it had stopped providing liquidity to some Greek banks," noted analyst Craig Erlam at trading group Alpari.

Investors worry that a messy Greek exit from the currency bloc could destabilize Spain's financial sector. The concern is that the banking sector might not be able to meet tough new provisioning requirements and require bailouts if concerns about their stability worsen.

The government, meanwhile, risks requiring a bailout itself if it needs to rescue the banks. It is already struggling to meet deficit-reduction targets during a painful recession, with austerity measures draining money from the economy.

British Prime Minister David Cameron on Thursday urged Europe to sort out its currency crisis, calling on the 17-country eurozone "to make-up or it is looking at a potential break-up."

"Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalized and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the Eurozone. Or we are in uncharted territory which carries huge risks for everybody," Cameron said in a speech in Manchester.

This is a breaking story. updates will be added as they become available. The Associated Press contributed to this report.

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