Strikes hit Greece and Spain as ECB deadline looms

ATHENS/FRANKFURT (Reuters) - Strikes in Greece and Spain highlighted resistance to Europe-wide austerity measures on Tuesday as the euro and shares tumbled ahead of a deadline for banks to repay a giant European Central Bank cash injection.

The fifth major strike this year by Greek unions disrupted tourism and public transport in protest at planned pension cuts and later retirement, while Spanish workers shut down Madrid's metro system in anger at a 5 percent public sector pay cut.

The risk premium on southern European government bonds over benchmark German bunds widened and the cost of insuring their debt against default rose as investors adjusted to the wider repercussions of the Greek debt crisis on the financial system at the end of the quarter, a traditional stress point.

Euro zone policymakers sought to reassure markets that Thursday's crunch date for banks to repay a record 442 billion euro ($539.4 billion) one-year liquidity injection would be managed smoothly.

Spanish Economy Minister Elena Salgado said she hoped the ECB was aware of the situation of her country's stressed banks, some of which have been shut out of inter-bank lending due to worries over bad debts and public finances.

"The ECB says it doesn't like governments to tell it what to do. I simply say I hope that in this occasion, as in others, the ECB will be aware of the needs of the Spanish financial system," Salgado told Spanish radio.

Thursday's repayment deadline coincides with the automatic date for some index-linked funds to dump Greek bonds from their portfolio after they were downgraded to junk status by ratings agency Standard & Poor's in June.

"The ECB and the Eurosystem will do what is necessary to make sure the liquidity is there," ECB Governing Council member Christian Noyer told France's Europe 1 radio.

"You shouldn't exaggerate things or be excessively worried," he said of potential problems in money markets, while conceding that some banks may suffer.

His colleague Ewald Nowotny said the ECB was committed to offering extra funds to ensure there is no liquidity squeeze.

The central bank has said it will provide unlimited three-month liquidity at its base rate of 1 percent until the end of the year, effectively putting its exit strategy from exceptional crisis-induced liquidity provision on hold.

SPANISH FURY?

Banks in Spain, Portugal and Greece have become disproportionately dependent on ECB funds because of difficulty accessing private sector financing due to concerns about their exposure to their country's sovereign and private debt.

The Financial Times reported that Spanish banks were furious the 12-month scheme would not be rolled over and wanted the ECB to offer more longer-term loans.

The health of Spain's banking sector has been a concern for international investors since a decade-long housing bubble burst, ushering in the worst recession in half a century.

While Greece has received a 110-billion-euro bailout from the euro zone and the International Monetary Fund in return for deep austerity measures to cut its huge deficit, Spain and Portugal are implementing milder budget cuts to try to avoid recourse to a 750 billion euro financial safety net.

In another indication of rising stress, the Euribor rates at which banks lend to each other in euros hit their highest levels in more than nine months on Tuesday ahead of the ECB deadline.

Concerns about liquidity supply helped push the euro to a lifetime low against the Swiss franc and a 1-1/2-year low against sterling.

European shares fell to their lowest in nearly three weeks with the main pan-European share index down 1.7 percent.

Investors are concerned that the combination of coordinated austerity measures across Europe and unresolved bank debts could derail a fragile economic recovery.

However, euro zone economic sentiment improved slightly in June after falling sharply the previous month at the peak of uncertainty over a euro zone rescue fund.

Howard Archer, chief European economist at IHS Global Insight said the weaker euro was probably giving some support to business confidence, although consumer confidence remained abnormally low.

"It is mildly encouraging that euro zone economic sentiment has not taken a further serious hit from the region's sovereign debt problems and tightening fiscal policy in June," he said.

"Nevertheless, sentiment appears fragile and significant downside risks remain to already pretty muted euro zone economic recovery."

(Additional reporting by Ingrid Melander in Athens, Blanca Rodriguez and Sonya Dowsett in Madrid, Crispian Balmer in Paris, Marcin Grajewski in Brussels; writing by Paul Taylor, editing by Jason Neely)

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