European markets stutter after Spain acts over bank losses

SPAIN’S plans for a fourth overhaul of its banking system in three years failed to convince European markets already reeling from the possibility of a Greek government prepared to tear up its bail-out agreement.

The country’s borrowing costs jumped back above 6 per cent after the centre-right government asked banks to set aside a further €35 billion (£27bn) against mounting losses incurred when the property market crashed.

The process is expected to involve further bail-outs and the part-nationalisation of Spain’s fourth-biggest lender, Bankia.

London’s FTSE 100 pared earlier losses but was still down a further 0.4 per cent on top of big drops in the previous two sessions.

France’s main index was also slightly lower, while Spain’s leading shares shed nearly 3 per cent and Italy’s were 2 per cent lower. Only Germany’s Dax managed to eke out modest gains.

Spain is also seen as being one of the most vulnerable eurozone countries to a disorderly Greek default, a spectre raised again this week after voters refused to back the parties which agreed Athens’ latest rescue package.

Yesterday the largest party proposing to reject the bail-out and default on debts looked no closer to forming a government for Greece either, raising the prospect of another election within weeks.

European leaders reiterated that there is no alternative to the deal agreed earlier this year, which saw a large chunk of Greek sovereign debt written off, if Greece wants to stay in the euro.

The turmoil comes as the Bank of England considers whether to extend its programme of money printing.

Its monetary policy committee meets today and economists say the outcome is on a knife edge. A further £25bn would give markets and business a shot in the arm but would add to already persistent inflation.