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THE GERMAN AND FRENCH governments have both come to accept that the era when leading euro zone countries enjoyed the very best sovereign debt ratings is nearing an end, but a downgrade could shake Paris far harder than it does Berlin. If S&P were to follow through in the coming weeks and slash euro zone ratings across the board, economists say the financial and political backlash would be tolerable, as it has been for the United States since the rating agency controversially cut its debt last August. However, if France suffers a downgrade before Germany the level playing field that has existed between Europe’s two biggest economies could be disrupted.

SPAIN says it expects its banks to set aside up to €50bn in further provisions on their bad property assets as part of a new round of reforms for the country’s financial sector. Luis de Guindos, economy minister in the centre-right government that took office two weeks ago after defeating the Socialists, said yesterday that it was essential that the banks clean up their balance sheets without imposing a burden on the treasury. The €50bn figure, equivalent to about 4% of Spain’s GDP, is higher than private expectations by bankers.

HUNGARY was forced to cancel a bond swap auction amid an escalating financial and political crisis that investors fear could trigger another dangerous shockwave in Europe. The Budapest government saw borrowing costs soar and the currency plunge as traders bet that international authorities may abandon Hungary.

MARKETS:

CONCERNS over the euro zone sent Britain’s top shares into reverse yesterday after the previous session’s sharp gains, as Italian lender UniCredit priced a rights issue at a huge discount, and a German bond auction failed to excite. The FTSE 100 fell 31.46 points, or 0.6%, to 5,668.45, albeit in light volume, at 79% of the 90-day daily average. Banks knocked the most points off the FTSE 100 as worries surrounding the sector crept back in when UniCredit priced its 7.5 billion euro rights issue at a discount of 69% to its closing share price on Tuesday and while the German 10-year auction was an improvement on a similar debt sale last November it was not enough to calm jittery investors.

ASIAN stocks lost ground this morning amid concerns that the Eurozone debt problems might be worsening. The MSCI Asia Pacific index lost 0.3% with Japan’s Nikkei Stock Average down 0.6% and Australia’s S&P/ASX off 1.2%. Hong Kong’s Hang Seng index managed a gain of 0.2% and China’s Shanghai Composite index inched up 0.1% as higher oil prices aided some energy share while South Korea’s Kospi Composite added 0.4%. Financials and exporters fell as investors shifted their focus back to Europe’s debt crisis amid speculation that Spain could be forced to seek an international bail-out, after the regional government of Valencia was late in repaying a €123m debt to Deutsche Bank and did so only with central government help.

CURRENCIES:

THE EURO approached an 11-year low against the yen before France sells bonds today on concern the region’s governments and banks will struggle to raise funds. The 17-nation currency slumped against 12 of 16 major peers after Greek Prime Minister Lucas Papademos warned his nation may face economic collapse as soon as March.

ENERGY:

EUROPEAN diplomats unveiled an agreement to block imports of Iranian crude yesterday, sending oil prices soaring to a seven week high. Brent crude futures touched $113.97 per barrel, up 2.4% on the day, before settling at around $113. Benchmark US crude edged over $103 after climbing more than $4 in the previous session. Prices eased later as investors cashed in on gains.

EU diplomats have yet to decide when sanctions against Iran should begin.

COMMODITIES:

COTTON production in India, the world’s second-biggest grower, will be less than previously forecast after unseasonal rains in some growing regions reduced yields, a textile mills group said. A smaller Indian crop may help a rebound in prices, which haveslumped 57% since reaching a record $2.197 per pound on the 7th of March on expectations of a bigger global harvest.

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