French race heats up as Merkel weighs in on behalf of Sarkozy and attempts to body slam Hollande. Growth vs Austerity battles loom....

http://www.guardian.co.uk/business/2012/apr/27/eurozone-crisis-live-downgrade-spain

12.22pm: Louise Cooper from BGC has written a very good note on the Spanish situation this morning, including the amazing fact (that I haven't checked yet) that one third of the eurozone's unemployed live in Spain.

Pointing out that bond yields spiked more on the terrible economic data from Spain than on last night's downgrade, she goes on to comment on the state of the country's banks, their exposure to dud property loans and how that compares to Ireland's banks.

She quotes a Bloomberg report in which BNP Paribas analyst Michael Sneyd estimates that Spanish banks need €100-120bn of new capital. Compare that, she says, with the €64bn that much smaller Ireland has pumped into its banks in three years and you begin to get an idea of the scale of the problem.

As Louise says:

That suggests that even Mr Sneyd's terrifying E120bn could be proved optimistically small.

So the real problem is the size of the property black hole. At the moment, it is best guesstimates as to how much Spanish banks will need to write down their property loans and therefore how large losses will be. The next question then has to be who will pay for the required recapitalization. The Spanish government doesn't want to - prime minister Rajoy has stated many times that the banks will not receive public money. That leaves bailout money – the EFSF and the ESM – with the cost being taken across Europe and the threat that most of the bailout funds are used just to save Spanish banks. This is likely to provoke fierce political rows across Europe.

Spain is the fourth largest economy in the Euro zone – this is a lot more serious than the catastrophes of Greece, Portugal and Ireland.

11.42am: To underline the point about the increasingly central debate about austerity, Ian Traynor has been looking at an interview with Angela Merkel in the German press which sets her up for a potentially bruising clash with her neighbor if Francois Hollande wins the French election next weekend.

Basically she says the fiscal pact cannot be renegotiated.

Ian writes:

Campaign noise? Or are we really heading for a bruising Berlin encounter as soon as Francois Hollande takes the Elysee? (Hollande 10 points ahead of Sarkozy in new poll this morning).

Chancellor Angela Merkel has strayed back into the French campaign, 
declaring in no uncertain terms that Hollande's calls for renegotiating the euro fiscal pact are futile.

In an interview published this morning by Germany's large Westdeutsche Allgemeine Zeitungsgruppe, Merkel also reasserts her support for Sarkozy as a political ally with whom she has worked closely throughout the euro crisis. Merkel said:

'The fiscal pact has been negotiated. It was signed by 25 heads of government and has already been ratified by Portugal and Greece. Parliaments everywhere in Europe are poised to pass it. There's a referendum on it in Ireland at the end of May. It cannot be re-negotiated.'

Hollande's response was equally to the point when news of the interview filtered out last night, telling French TV that "Germany can't decide on its own for all of Europe".

Ian goes on:

If he is elected president, he will have a clear mandate from the French people to re-open the pact, Hollande insists, regardless of its ratification stage.

Herman Van Rompuy, who runs EU summits as president of the European
Council, has written to EU leaders this morning telling them he might summon them to an "informal dinner" in Brussels before the next scheduled summit at the end of June. Early June is being talked about in Brussels.

Reflecting the change in tone on how to tackle the euro crisis, triggered by Hollande and Mario Monti in Italy, Van Rompuy told the 27 national leaders: "We have had to deal with the urgent pressures of the sovereign debt crisis. The emphasis should now shift increasingly to prioritizing measures that can boost growth and jobs."