Suddenly, financial markets around the world have got another dose of the credit crunch blues.

A series of reports, ratings changes and general unease about the stability of financial markets in the past 24 hours have produced the sudden upturn in concern.

Our Reserve Bank still has a bias to cut rates, if it can, but it and other central banks will be watching Europe in particular where many of the latest worries are concentrated.

The minutes of the RBA board meeting a fortnight ago and released this morning confirm the moderating inflation-interest rate cut link that appeared in the post meeting statement by Government Glenn Stevens, and then in a speech he made in Townsville a day later on the current state of the economy.

The minutes said: “Board members did not see a pressing case for any further action at this meeting, though they viewed the inflation outlook as affording scope for some further easing of monetary policy, if that were to be needed to support demand at a later stage.”

So no rate cut for the moment, but we were left in no doubt that if the need arose “members judged that maintaining the current stance of monetary policy for the time being would be consistent with fostering sustainable growth and low inflation, and would leave adequate flexibility to respond to developments as needed over the period ahead.”

But that was two weeks ago.

Since then sharemarkets and commodities seem to have peaked for the time being at seven and eight month highs. Markets were overnight rattled for the first time in two months by a stark warning about the health of the European financial system and by a combination of those fears, tired markets and nervy investors and some unexpected news in a business survey, plus rising credit card debts and a couple of big corporate collapses in the US.

The US dollar tightened with positive comments from the Russian Finance Minister about the US dollar said to be behind the greenback’s rise, but the comments from the ECB and the reminders of instability in US financial markets, were bigger catalysts as was Moody’s cuts to the ratings of 30 Spanish bank or their outlooks.

Moody’s cut the ratings of 18 banks by one notch and seven others by two. The downgrades included several of the country’s savings banks, which are weak and face mergers or bailouts.

Moody’s put some or all of the ratings of eight other banks under review for further possible downgrade, including one of the country’s biggest, BBVA.

Moody’s also put the struggling Swiss giant, UBS for another possible downgrade saying the challenges bank faces are “unlikely to be short-lived, and pose greater risk to bondholders than it had previously believed.”

The ECB said it was expecting fresh bank write-downs to hit $US283 billion by the end of next year.

“Policy-makers and market participants will have to be especially alert in the period ahead. The credit cycle has not yet reached a trough,” ECB’s latest Financial Stability Report said.

“Hard-to-value assets have remained on bank balance sheets and the marked deterioration in the economic outlook has created concerns about the potential for sizeable loan losses.”

The ECB stability report identified the main risks within the euro-area financial system as: the possibility of a renewed loss of confidence in banks, more widespread asset price declines and balance sheet strains emerging among insurers. Outside the financial system, stability risks identified by the ECB include the possibility of U.S. house prices falling further than expected, an even more severe economic slump and an intensification of the stresses already endured by central and eastern European countries.

It estimated bank write-downs due to securities-or toxic assets-would total around $US218 billion from the start of the financial turmoil to the end of 2010, while bad loans would account for another $US431 billion — a total of $US649 billion, with an estimated $US366 billion already announced.

The Stability Review stated that risks to the financial sector had increased in the last six months amidst a deterioration in the economic environment which is putting pressure on the bottom line of companies and households in Europe.

“The contraction of economic activity and the diminished growth prospects have resulted in a further erosion of the market values of a broad range of assets. Connected with this, there has been a significant increase in the range of estimates of potential future write-downs and losses that banks will have to absorb before the credit cycle reaches a trough.”

European unemployment rose in the first quarter, exports fell and industrial production again weakened in April as German output dropped.

In Germany, the bank-rescue fund Soffin said deep recession was leading to a “massive sharpening” of bank losses on risk assets, endangering the capital base of the financial sector.

The Germans have already nationalised the mortgage lender, HRE after it absorbed 102 billion Euros of Soffin’s 500 billion euro reserve. Some 13,000 applications have been made for help to the industry bailout fund where 5 billion Euros of its 115 billion euro fund have been paid out.

The Opel car group is a major beneficiary so far, but a lot of other smaller groups are being left out, including the owners of Germany’s biggest department store chain.