Euro zone sovereign debt crisis seen spilling over to banks

European finance ministers are worried of a renewed credit crunch arising from a "systemic" crisis in the euro zone sovereign debt and the crisis spilling over to banks across the 17-member euro zone.

Reports quoting senor EU officials who are scheduled to meet in Poland over the next two days said the euro zone area faced the "risk of a vicious circle between sovereign debt, bank funding and negative growth".

The reports come after the European Central Bank provided US dollar loans to euro-zone banks for the second time in six months. Spanish banks are now dependent on ECB funding on a daily basis and their dependence is increasing by the day. This is further fueling fears that Europe's debt woes could lead to a credit crisis, pushing the euro bloc back into recession.

Reports, meanwhile, said Moody's Investors Service downgrade hit the ratings of two French banks. Analysts see this as an indication that the debt crisis that started nearly two years ago in Greece is now threatening some of the region's largest economies.

"While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic," a Reuter report quoted the Economic and Financial Committee as saying in a report.

The ministers are expected to prepare plans for further reinforcing of bank resources by recapitalising them. Ministers from Europe's largest economies, including Germany and France held crucial talks with Greek leaders in a conference call on efforts needed to avert a Greek default that could cause a global financial shock.