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The European leaders can deny a multi-billion rescue package for Spain, but the wheels are already in motion – foreign banks refuse lending money to Spanish banks, and the government may be unable to supply the liquidity. EUR/USD is also in a downwards motion, ending the short lived party. Also the ZEW Economic Sentiment was terrible – showing that German investors are very worried.

Talks between European leaders will be held on Thursday in Brussels. A report towards this event suggested that Spain will ask for 100 billion euros of aid money in order to refinance its debt. The rumor was denied in Brussels and in Madrid. But Spanish Treasury Secretary Carlos Ocana didn’t deny that there were serious problems:

The Spaniards admitted that European banks were refusing to lend money to the smaller Spanish savings banks, the “Cajas”. This lack of confidence sends us back to the days of the credit crunch.

Greek default getting closer –  EUR/USD begins falling

The common currency was recovering last week, and continued rising this week as well, approaching the “Lehman levels”, the 1.2330 resistance line. This party was short lived. The fall began with Moody’s downgrade of Greece. Greek bonds are now junk according to Moody’s. This sent EUR/USD under 1.23.

While the Greek troubles are with us for quite a while, attention has left Greece since the 110 billion euro aid package was promised. This four-notch downgrade is problematic, as it’s the first one after the bailout package was approved.

Moody’s has no confidence that Greece can pay its debt, even with the huge EU and IMF aid.

Big Spanish fears Send Euro lower

The fall escalated with the troubles in Spain, the fourth largest economy in the Euro-zone, which is responsible for 12% of GDP. The credit crunch in Spain sent EUR/USD down to 1.2190 at the time of writing, after bouncing off the 1.2150 support line.

Below 1.2150, the next line is the round number of 1.20, followed by the year-to-date low of 1.1876.

Fear of Dictatorship

The continent faces a double dip recession, that could slow down the whole world. And now there’s even new fear. According to European Commission Jose Manuel Barroso, Greece, Spain and Portugal could fall back into dictatorships.  Barroso laid out this  apocalyptic scenario at a closed meeting  last week.

This scenario looks far from reality at the moment, but when it comes from such a high ranking European official, the words also weigh on the Euro.

Germans investors are worried

Update 9:30 GMT: The highly regarded ZEW Economic survey was a huge disappointment. The survey of 350 German institutional investors and analysts dropped from 45.8 to 28.7 points. Early expectations stood on a rise to 48.7 points.

These are the lowest levels since April 2009 – the lowest in 14 months. This index already reached 57.7 points in September 2009. A very strong drop was also reported in the all-European figure – that fell from 37.6 to 18.8, also falling short of expectations for a rise.

It seems that there’s a serious issue of trust in the old continent. Is a new snowball of credit crunch beginning to form?

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