By Oliver Biggadike and Ben Levisohn May 25 (Bloomberg) -- The euro fell to the lowest level since 2001 against the yen amid concern weakness in Spain’s savings banks signals an expansion of Europe’s sovereign debt crisis that may hinder global economic recovery. The won slumped as tensions escalated between the two Koreas over the sinking of a warship from the South’s navy in March. The 16-nation shared currency declined versus the dollar as the International Monetary Fund said Spain has been too slow to strengthen its banking system, adding to speculation Europe’s financial institutions may face more losses. The rate banks say they pay for three-month loans in dollars rose for an 11th day. “It very much feels like panic out there,” said Chris Diaz, co-portfolio manager of the $400 million ING Global Bond fund in Atlanta. “There’s concern over contagion and whether it will bring the global economy back into recession. The yen is rallying in a risk-off environment and every other currency is getting beaten up.” The euro weakened 1.6 percent to 109.88 yen at 10:15 a.m. in New York after dropping to as low as 108.84 yen, the least since November 2001. The common currency depreciated 0.9 percent to $1.2254, after falling as low as $1.2178. It reached a four- year low of $1.2144 on May 19. The dollar declined to 89.52 yen, from 90.29 yen. “We can’t find anyone who’s bullish on the euro -- period,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York. “The market was already quite unstable and you get a few shocks going through and it accelerates the machine.” Austerity Measures Spain’s banking industry “remains under pressure” as consolidation has been “too slow,” the Washington-based IMF said in a report yesterday after a regular review of Spain. The IMF said it fully supports Spain’s new austerity measures that plan to rein in the budget deficit with the deepest spending cuts in three decades. Four Spanish savings banks plan to combine to form the nation’s fifth-largest financial group with more than 135 billion euros ($165 billion) in assets, as regulators push ailing lenders to merge with stronger partners. The Bank of Spain said on May 22 it appointed a provisional administrator to run CajaSur, a savings bank crippled by property-loan defaults. The seizure is the first under a state- financed rescue plan that Standard & Poor’s estimates may cost as much as 35 billion euros, increasing the burden on Spain’s finances as the government tries to reduce its budget deficit. ‘Widespread Disruption’ Stresses in Spain’s banking system are intensifying concern that the Greek debt crisis may spread, Mohamed A. El-Erian, whose company runs the world’s biggest mutual fund, said in an interview with PBS. “The minute you introduce strains in the banking system, there’s always a fear that governments will be behind the curve and that you can get contagion,” El-Erian, co-chief investment officer at Pacific Investment Management Co., said on PBS’s Nightly Business Report. “You can get widespread disruption.” Corporate and sovereign credit risk indicators jumped to the highest level in 10 months, and the rate banks say they pay for three-month loans in dollars climbed for the 11th day as Europe’s debt crisis and Korea tensions spooked investors. The London interbank offered rate, or Libor, for such loans advanced to 0.536 percent, the highest level since July 7, from 0.510 percent yesterday, according to data from the British Bankers’ Association. The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, widened to the most since July 16. Credit-Default Swaps Credit-default swaps on the Markit iTraxx Crossover Index of 50 European companies with mostly junk credit ratings climbed 56 basis points to 640, the highest since July 29, according to Markit Group Ltd. at 12:07 p.m. in London. In Asia, a gauge of investment-grade borrowers also rose to a 10-month high. Europe’s currency has lost 6.9 percent this year, based on Bloomberg Correlation-Weighted Indexes. The dollar has risen 10.8 percent and the yen has advanced 15.4 percent. Japan’s currency rose versus all 16 major counterparts as the Standard & Poor’s 500 Index fell 2 percent. The yen is the world’s “favored” safe haven as money markets act as they did in the precursor to the 2008 global financial crisis, according to Bank of Tokyo-Mitsubishi UFJ Ltd. ‘Widespread Panic’ Japan’s net international investment position of 56 percent of the economy by the end of 2009 and an investment income surplus larger than the trade surplus “ensure a strong yen performance in times of market uncertainty,” Derek Halpenny, European head of currency research at Bank of Tokyo, wrote in a note to clients today. The won weakened amid concern conflict on the Korean peninsula may escalate. O Kuk Ryol, vice chairman of North Korea’s National Defense Commission, said the nation is ready to counter any attacks from South Korea, according to North Korea Intellectuals Solidarity, a Seoul-based group run by defectors from the communist country. Yonhap News agency reported on the group’s posting earlier today. “Tensions between the North and South heightened today, with widespread panic, coupled with weaker equity markets driving massive dollar buying interest,” said Bernard Yeung, head of foreign-exchange trading at National Australia Bank Ltd. in Hong Kong. South Korean President Lee Myung Bak said yesterday the country will push for United Nations censure against North Korea for the March 26 sinking of a naval ship, which killed 46 sailors. A multinational team concluded on May 20 that North Korea fired a torpedo to split apart the 1,200-ton Cheonan. The won slumped 3 percent to 1,251.10 per dollar, according to data compiled by Bloomberg, after earlier reaching 1,277.85, the lowest since July 16. To contact the reporter on this story: Ben Levisohn in New York at blevisohn@bloomberg.net.

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