Spaniards alarmed by the dire state of their banks are squirreling money abroad at the fastest rate since records began, figures showed on Thursday, and the credit ratings of eight regions were cut, Reuters reported. Spain is the next country in the firing line of the euro zone's debt crisis, with spendthrift regions and shaky banks threatening to blow a hole in state finances and pushing funding costs towards levels that signal the need for a bailout.

The European Commission challenged Germany’s remedies for the financial crisis, calling for direct euro-area aid for troubled banks and demanding a path to common bond issuance, Bloomberg reported. The commission, the European Union’s central regulator, sided with Spain in proposing that the planned permanent rescue fund, the European Stability Mechanism, inject cash to banks instead of channeling the money via national governments. “Flexibility and speed of action will be of the essence,” Jose Barroso, the commission’s president, said in Brussels yesterday.

The European Commission threw Spain, the latest frontline in Europe's debt war, two potential lifelines on Wednesday, offering more time to reduce its budget deficit and direct aid from a euro zone rescue fund to recapitalise distressed banks, Reuters reported. Spanish government borrowing costs lurched higher and the Madrid stock market hit a nine-year low with investors rattled by the parlous state of its banking sector fleeing to the relative haven of German bonds.

Continued concerns about Spanish banks sent the country's stock market to fresh nine-year lows, the two-year German yield to zero and the euro to its weakest level against the dollar in nearly two years, The Wall Street Journal reported. Investors scrambled for safe havens, dumping stocks as well as debt from Italy and Spain, two financially stressed nations that also are among the biggest in the 17-nation euro zone.

Irish banks will need up to €4 billion more over the next six years to meet international rules on the levels of capital they must hold, the deputy governor of the Central Bank Matthew Elderfield has said, the Irish Times reported. In an interview with German newspaper Boersen-Zeitung, Mr Elderfield said the banks would require a further €3 billion-€4 billion to meet the international capital rules but he hoped the banks would be able to raise this funding themselves from profits.

A debt-laden Spanish construction firm became the latest European company to unload assets onto eager Chinese buyers, as Europe's debt woes force firms to look to China for cash, The Wall Street Journal reported. State Grid Corp., China's government controlled power-grid operator, said Tuesday it would buy high-voltage electricity transmission assets in Brazil from Spain's Actividades de Construccion y Servicios SA for 1.86 billion reais ($938.2 million), including debt.

Its membership in the euro currency union hanging in the balance, Greece continues to receive billions of euros in emergency assistance from a so-called troika of lenders overseeing its bailout. But almost none of the money is going to the Greek government to pay for vital public services. Instead, it is flowing directly back into the troika’s pockets, the International Herald Tribune reported.

Three small Spanish savings banks agreed to merge and a larger bank separately said it would sell a key asset as local lenders scramble to shore up their capital bases in the midst of an unprecedented financial crisis, The Wall Street Journal reported. Unlisted savings banks Liberbank, Ibercaja and Caja3 said Tuesday their boards approved a three-way merger of relatively healthy lenders that will create a bank with more than €110 billion ($137.96 billion) in assets and a dominant position in the northern Spanish regions of Asturias and Aragon.

European Union countries could be obliged to bail out one another's struggling banks, according to a draft EU law that marks a big step towards greater EU financial integration likely to upset some members, particularly Germany, Reuters reported. Spain's banking troubles and the risk that a bank run in a country such as Greece could spread have given new impetus to delayed EU proposals for a law to deal with failing banks.

Some of China's biggest banks have cut off a handful of their European counterparts from borrowing and derivatives trading as they seek to reduce their exposure to the simmering crisis on the Continent, people familiar with the matter said, The Wall Street Journal reported. Chinese state-owned banks including Industrial & Commercial Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co.