Doubts over Spanish bank bail-out put stock markets into reverse

FINANCIAL markets slumped yesterday as investors sounded an alarm over the bail-out of Spain’s debt-stricken banks, amid fears about its impact on public debt and bondholders.

European shares rose sharply to a four-week high in early trading, but doubts then set in about the next risks in the eurozone’s crisis and the terms of the £80 billion deal to recapitalise Spain’s ailing banking sector.

The news came as a senior economist at one of the UK’s leading business organisations warned that the Spanish bail-out would not be enough to prevent the collapse of the eurozone.

Graeme Leach, chief economist at the Institute of Directors, said that the future of the euro “remains in serious doubt”.

He said: “Although the bail-out will certainly help the Spanish banking system, the fundamental situation in Spain is the same this morning as it was a week ago. We are seeing a predictable short-term rally, but the future of the euro remains in serious doubt.”

Meanwhile, market concerns saw borrowing costs for Italy and Spain both rise, with ten-year Italian bond yields increasing from 5.758 per cent to close at 6.032 per cent.

The rise in Italian bond yields suggests that investors are concerned about whether Italy will be the next country to get into difficulties.

Spanish bond yields were also up, to almost 6.5 per cent last night.

Ratings agency Fitch downgraded two Spanish banks, Santander and BBVA, by two notches, from A to BBB+.

In London, the FTSE 100 index closed 2.7 points down at 5,432.37. And as markets started to worry about the details and how the bail-out would be financed, the euro gave up most of the day’s gains on foreign exchanges.

In New York, the Dow Jones industrial average closed almost 142 points, or 1.13 per cent, down. The German and French markets finished the day more or less flat after showing substantial gains earlier.

Stock markets worldwide had opened higher after the Spanish deal but their initial enthusiasm later faded, amid fears about further bails for eurozone members.

Cyprus, which is deeply exposed to Greece, strongly hinted yesterday that it may apply for an international bail-out before the end of this month, both for its banks and for the state.

The latest crisis was sparked by Spain’s weakest banks being left with billions of euros of bad loans following the collapse of a property boom and the subsequent recession.