The euro fell to a four-month low against the U.S. dollar Friday after Germany's finance minister said the market turmoil over Europe's debt crisis could drag on for up to two more years.
The common currency later recovered, but European markets remained negative after Spain's central bank said that the level of bad loans on the books of the country's banks has risen to an 18-year high.
After Wolfgang Schaeuble’s comments, the euro dropped as much as 0.4 per cent to $1.26 US, but by late morning had rebounded to trade up 0.13 at 1.27.
"In 12 to 24 months we'll have a calming of financial markets," Schaeuble told French radio Europe 1.
He also says it's vital that during this weekend's G8 summit outside Washington that Europe's leaders show the world they are moving more quickly to stem the crisis that is jeopardizing economic recovery around the world.
Schaeuble said the leaders "weren't good enough" over the past two years of unending crisis in Europe.
"It's very important during the G-8 to show that Europe can achieve common positions more quickly."
In advance of the talks, German Chancellor Angela Merkel struck a conciliatory note this week.
She said in a television interview this week that she was open to measures to help stimulate Greece's economy as long as the country honours its commitments to shrink its debts.
The rising tide of bad loans led ratings agency Moody's Investor Services on Thursday to downgrade 16 Spanish banks exposed to Spain's recession, a gloomy real estate market and high unemployment.
Despite data from the Bank of Spain that the bad loan ratio among Spanish banks had risen in March to 8.36 per cent from 8.15 per cent the previous month, shares in Bankia, a recently nationalized bank that is heavily laden with toxic real estate loans, rebounded almost 24 per cent.
It stock plummeted Thursday on a media report that depositors had withdrawn €1 billion ($1.3 billion Cdn) in the week since the state took over.
But European markets closed in the red, with London's FTSE 100 off 1.39 per cent, Frankfurt's DAX dipping 0.65 per cent and the Paris CAC 40 down 0.13 per cent.
The nervousness about Spain's banks comes as the eurozone financial crisis intensifies.
Political turmoil in Greece has increased the likelihood that it could leave the 17-country monetary union, a move that could have ripple effects throughout Europe and the world's financial markets.
Greeks go back to the polls June 17 after an election May 6 proved inconclusive.
There are concerns that parties campaigning for an end to the austerity measures that have secured vital bailouts will be in a stronger position after the vote.
And today, European Commission trade commissioner Karel De Gucht told a Belgian newspaper that the Commission and the European Central Bank are preparing contingency plans should Greece have to leave.