* MSCI world equity index unchanged on day at 214.43
* S&P ratings downgrade on Spain hits euro
* UK bank rescue package help Europe shares; bonds weaker
By Natsuko Waki
LONDON, Jan 19 (Reuters) - The euro slipped on Monday after
Standard & Poor's cut Spain's credit rating, while world stocks
erased earlier gains made after Britain launched a multi-billion
rescue plan for its troubled banks.
S&P cut Spain's long-term sovereign credit ratings to AA+
from AAA, after it downgraded Greece last week and gave recent
warnings on Ireland and Portugal. Worries about European
government debt burdens have been growing as countries fund
packages to boost local economies.
"It's a theme in general ... and it will continue to run for
a while. Looking at the fiscal balances in Europe, that's where
the economic crisis is hurting at the moment - Ireland and
Southern Europe," said Neils From, chief analyst at Nordea in
Copenhagen.
The euro hit a session low of $1.3217 <EUR=> after the news,
before trimming losses to $1.3230 -- still down 0.7 percent on
the day.
The yield premium investors sought for holding the 10-year
Spanish benchmark bond compared with the more liquid German
government bond held at 114 basis points, having hit a record
122 bps earlier.
UK RESCUE PLANS
Shares in Europe came off earlier highs, with the
FTSEurofirst 300 index of leading European shares <> up
0.3 percent on the day. The MSCI world equity index
<.MIWD00000PUS> was up less than 0.1 percent.
European shares rose more than 1 percent earlier after UK
bailout plans, which will allow banks to insure against steep
losses and guarantee their debt to stop the credit crunch
pushing the economy into a deep slump.
"It's a very positive step, and it should be helpful in
easing conditions ... But it does fall short of what I think is
the ultimate solution, which would be the creation of a bad
bank," said Robert Talbut, Chief Investment Officer at Royal
London Asset Management.
During the U.S. savings and loans crisis of the 1980s and
1990s, the creation of a "bad bank" to park soured assets
allowed authorities to cleanse financial institutions of
troubled assets.
The plan raises the government's stake in Royal Bank of
Scotland <RBS.L>, which said it lost over 20 billion pounds last
year, and also lays the framework for the Bank of England to
boost money supply. RBS shares fell more than 40 percent to a
23-year low.
The incoming U.S. administration is also poised to act. The
senior advisor of U.S. President-elect Barack Obama, who is set
to take office on Tuesday following a national holiday on
Monday, said there would be changes to make the second half of
the country's $700 billion bank rescue scheme more effective.
The measures on both sides of the Atlantic come as the
credit crunch, well into its second year, squeezes corporate
profits, hits consumer spending and pushes many major economies
into recession.
Emerging stocks <.MSCIEF> rose 0.2 percent.
U.S. crude oil <CLc1> fell 2.5 percent to $35.49 a barrel,
pressured by signs of a resolution of a gas row between Russia
and Ukraine and a ceasefire between Israel and Hamas in Gaza and
concerns about weakening oil demand.
Safer government bonds fell across the board as stocks and
other risky assets outperformed. The March bund future <FGBLc1>
fell 58 ticks.
The dollar fell 0.4 percent to 90.64 yen <JPY=> while it was
steady <.DXY> against a basket of major currencies.
(Editing by Ruth Pitchford)
