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Spain Banking Sector Shaken By Report Of Bank Run

"In these turbulent economic times, I must say that Bankia's activity over these past few days has been basically normal," Goirigolzarri said. "It has been basically normal. I think it is important to point this out, just as I think it important to note that our customers should feel very confident and very sure because Bankia is a tremendously solid institution."

In a further statement, the company said 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.

Nonetheless, the newspaper report sparked a sell-off of Spanish bank shares. Banco Santander SA, Europe's biggest bank by assets, fell 1.7 percent while shares in Banco Bilbao Vizcaya Argentaria SA, Spain's second-largest lender, dropped 2.8 percent. Bankia shares recovered in afternoon but closed down 14.1 percent lower at ⿬1.42 each.

Moody's Investor Service's downgrade on Thursday of 16 Spanish banks is bound to further rattle investors. The agency said it took the action because the banks face a rising tide of bad loans with Spain's economy again in recession, its real estate market a shambles and its unemployment rate stubbornly high.

The country's banking sector is further threatened by its exposure to the Eurozone debt crisis.

Investors worry that a messy Greek exit from the eurozone bloc could further destabilize Spain's financial sector. The concern is that the banks might not be able to meet tough new capital defense requirements and need 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 unemployment of nearly 25 percent and austerity measures draining money from the economy.

Concerns over banks' exposure to the eurozone's debt crisis once again slammed Europe's financial sector over the past week. The political vacuum in Greece following the inconclusive election result nearly two weeks ago has led to an increase in funds being drawn from the country's banks.

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