Spain's economy sank deeper into recession in the second quarter, its central bank reported, as investors spooked by a funding crisis in its regions pushed the country ever closer to a full bailout. Meanwhile, Moody’s downgraded Germany’s outlook to negative over fears that the eurozone crisis is far from over.

Economic output shrank by 0.4% in the three months from April to June having slumped by 0.3% in the first quarter, the Bank of Spain said in its monthly report on Monday (23 July).

Economy Minister Luis de Guindos ruled out a full-scale financial rescue on top of the ?100 billion already earmarked for the country's banks, but Spain's sovereign bond yields stayed mired in the danger zone.

In contrast to de Guindos, who told lawmakers there was little else Spain could do to ease the tensions after launching a ?65-billion austerity package last week, the central bank's deputy governor said more belt-tightening was needed.

Market tension “reflect problems in Spain as well as the eurozone," Fernando Restoy said after a conference in Madrid.

"We need to continue further along the same line. We need more cuts, more reforms which will restore market confidence and mechanisms which will strengthen the monetary union."

Earlier, media reports suggested half a dozen regional authorities were ready to follow Valencia in seeking financial support from Madrid.

Prohibitively high refinancing costs have virtually shut all of the 17 regional governments out of international debt markets, forcing the worst hit to seek loans from the central government to meet bond redemptions.

Spain's sovereign debt yields rose above 7.5% on 10-year paper on Monday, well above the 7% level that triggered the spiral in borrowing costs that led to bailouts for other eurozone states.

In a sign of a growing awareness among the eurozone's heavy hitters of the need to protect Spain, Economy Minister De Guindos was due in Berlin today to meet with his German counterpart Wolfgang Schäuble.

"We believe that the reforms already begun by Spain will help calm the markets," Schäuble spokeswoman Marianne Kothe said in Berlin, adding that the regions' funding problems had "nothing to do with" the European rescue deal for the country's banks.

Germany knew of no plans for a broader Spanish bailout request, she said.

German outlook ‘negative’

But Europe’s paymaster is facing its own troubles. Moody's Investors Service on Monday changed its outlook for Germany, the Netherlands and Luxembourg to negative from stable as fallout from Europe's debt crisis cast a shadow over the eurozone's top-rated countries.

Moody's cited an increased chance that Greece could leave the eurozone, which "would set off a chain of financial sector shocks ... that policymakers could only contain at a very high cost."

It also warned that Germany and other countries rated 'Aaa' might have to increase support for troubled states such as Spain and Italy that are struggling to finance their deficits.

The burden of that support would fall most heavily on the eurozone's top-rated states, it said.

The agency affirmed Finland's 'Aaa' rating and stable outlook, but said all four countries were adversely affected by uncertainty about the outcome of the euro area debt crisis.

Moody's said it would also weigh the eurozone developments' impact on Aaa-rated Austria and France. Those countries' outlooks were lowered to negative in February, and Moody's now expects, by the end of the third quarter, to "review whether their current rating outlooks remain appropriate or whether more extensive rating reviews are warranted."

Rival agency Standard & Poor's maintains a stable outlook for Germany but negative outlooks for Luxembourg, the Netherlands and Finland. All are rated 'AAA'.

Fitch Ratings rates all four AAA and gives them stable outlooks.

Standard & Poor's rates France AA-plus with a negative outlook; Fitch rates France AAA with a negative outlook.

Standard & Poor's rates Austria AA-plus with a negative outlook; Fitch rates Austria AAA with a stable outlook.