STOCKS in Asia and Europe were savaged yesterday as fears grew that the eurozone is unravelling.

Credit rating agency Moody's cut the ratings of 16 Spanish banks on Thursday, just three days after it slashed its ratings on 26 Italian banks.

Also on Thursday, rival rating agency Fitch downgraded Greece's sovereign-debt rating to triple-C from B-minus, warning that the country could be forced to leave the eurozone if new elections next month do not produce a government with a mandate to continue the reforms demanded in exchange for a bailout.

The incessant bad news sent stocks tumbling across Asia.

Japan's Nikkei-225 index fell 3 per cent to 8,611.31, while Hong Kong's Hang Seng Index slid 1.3 per cent to 18,951.85.

Here, the Straits Times Index ended 1.5 per cent lower at 2,779.10, suffering a third straight day of losses.

In Europe, major stock indices started sharply lower, but recovered later in the day. In Spain, some stocks rebounded strongly amid speculation that banks were lobbying the country's regulator to reinstate a ban on short-selling of local banking stocks.

"Until we get clarification from the second Greek elections on June 17, the markets are going to continue bouncing around like this," said Kelvin Tay, chief investment strategist at UBS Wealth Management in Singapore.

The US dollar has benefited from the renewed turmoil in Europe this month as investors sold risky assets and bought safer instruments such as US Treasury bonds.

The US dollar index, which tracks the value of the greenback against other major currencies, has risen more than 3 per cent since the start of May. At 10 pm yesterday, one US dollar bought 1.274 Singapore dollars, compared with 1.238 Sing dollars at the start of the month.

If the so-called troika comprising the European Central Bank, European Commission and International Monetary Fund withold the next aid payment to Greece, its government will run out of euros to pay pensions and workers' wages. That could force the Greek government to print its own money, effectively creating a new currency that would fall drastically in value against the euro, hurting Greek businesses and households further.

"A reintroduced drachma would likely depreciate very significantly, and many local companies would need to default on their foreign currency debt, including debt denominated in euros," Barclays Capital analysts said in a report.

One of the biggest fears is that a Greek exit from the eurozone would trigger bank runs in other vulnerable countries such as Portugal, Ireland, Italy and Spain as depositors rush to withdraw their cash and stash it elsewhere to avoid a similar loss of their savings if their own countries abandon the euro. Such panic would likely feed on itself, severely damaging confidence and causing multiple banks to collapse.

Another debt restructuring by Greece looks "close to unavoidable", UBS' global economics research team said in a report yesterday. That alone could cost European tax payers another 60 billion euros, they estimated.

But a Greek exit from the eurozone would cost them more than three times as much, even before counting the likely damage from contagion, they warned.

Still, that outcome looks increasingly likely and many analysts expect Greece to eventually leave the eurozone.

Opinion polls show that Syriza - the upstart Greek political party led by Alexis Tsipras, who has fought against harsh public-spending cuts imposed on the country in exchange for emergency loans - could win the biggest share of the public vote in next month's election. Mr Tsipras has repeatedly called on other European leaders to relax the conditions attached to Greek bailout funds - a demand that his counterparts, many under intense political pressure from their own voters, have rejected.

The threat of forcing Greece out of the eurozone is "the only feasible threat" left to make it accept economic reforms, Royal Bank of Scotland analysts said in a report. But that threat is a double-edged sword - the main argument against using that threat against Greece, the analysts noted, "is the contagion" risk that it poses to other countries.