Is Spain’s €100bn Bailout Just A ‘Sticking Plaster’ For Eurozone Crisis? Fears Grow As Bounce In The World Markets Fizzles Out

A global market rally over a European bailout of Spanish banks faded today, as investors worried the country might have trouble paying the money back. 

Finance ministers from the 17 countries that use the euro said they were willing to lend Spain up to €100billion after Madrid said it would need help to shore up banks felled by bad real estate loans. 

Spain has not said exactly how much of that it will tap, but markets were initially cheered by the fact that it was finally owning up to needing help.

But early gains were largely lost, however, as analysts warned the deal would not spell the end of Europe’s debt crisis. 

Some worry that the Spanish government, which is responsible for paying the money back, will struggle with the extra debt. 

The government will try to get the money back from the banks, but if it cannot do so, it will have to borrow on international markets, where its borrowing rates are high.

After an initial 5 per cent surge, Madrid’s Ibex stock index was up a mere 0.6 per cent. 

France’s CAC-40 rose 0.7 per cent to 3,070.54 and the DAX in Germany gained 1 per cent to 6,194.17. The FTSE index of leading British shares was up 0.3 per cent to 5,450.40. 

The euro, which had surged over the weekend on news of the Spanish aid deal, fell back down, trading 0.7 percent lower at $1.2555.

Wall Street edged higher on the open, with the Dow industrial average and the S&P 500 both gaining 0.2 percent, to 12,582.01 and 1,328.14 respectively. 

Asian stocks closed higher earlier in the day following better-than-expected data on the weekend that showed China’s exports jumped in May from a year earlier. 

Japan’s Nikkei 225 index climbed 2 per cent to close at 8,624.90. South Korea’s Kospi added 1.7 per cent to 1,867.04 and Hong Kong’s Hang Seng added 2.4 per cent to 18,953.63. 

Benchmarks in Singapore, Taiwan, mainland China, Indonesia and New Zealand also rose.

Michael Hewson, analyst at CMC Markets, said the early market reaction had been a ‘relief pop’ that was bound to be short-lived.

He said: ‘The decision by Spanish PM Rajoy to acquiesce to the inevitable and request help for Spain’s ailing banking sector at the weekend is the first sign of an acknowledgment of the problems facing the Spanish economy.

‘But the fact it took so long in the face of so much denial remains a problem with respect to the credibility of the Spanish administration.’

The day of stormy trading came as angry Greeks and Irish demanded better terms on their country’s bailout after Spain was handed what they see as a ‘no-strings attached’ €100billion cash boost.

Greece’s far-left party Syriza, which could win the re-run of the country’s elections on Sunday, said the Spanish deal ‘showed Europe was abandoning its policy of austerity’.

The agreement, they said, was in stark contrast to the deal hammered out with the Greeks two years ago.

That saw the nation hit with strict rules including tight supervision and submitting to regular inspections by the troika of the European Commission, the European Central Bank and the International Monetary Fund.

Spain has only been told to restructure its trouble financial sector – currently lumbered with billions of euros worth of bad loans by the bursting of the Spanish property bubble.

Party leader Alexis Tsipras, Greece’s possible next Prime Minister, told Avgi newspaper: ‘Developments in Spain have confirmed the position we have supported from the start.

‘Namely, that the crisis is a Europe-wide problem and that the way it has been dealt with so far is socially destructive and completely ineffective.

‘Two years ago the crisis was related to the supposed laziness and unproductiveness of the Greeks.

‘After two years of failure of the bailout memorandum, there is a dramatic increase in the voices calling for a policy change so as not to crash the whole European economy.’

Greek politicians have also said that the Spanish deal will give them room to renegotiate their deal to include less austerity measures.

The eurozone’s fourth largest economy is beset by recession and mass unemployment and still has a weight of national and regional debt to roll over later in the year, although it has got through 58 per cent of its borrowing for 2012.    

Moody’s Investor Service said last week the debts of euro area sovereigns dependent upon official funding present ‘non-investment grade risks’, prefiguring a likely cut in Madrid’s credit rating. Fitch Ratings slashed Spain by three notches to BBB last week – just above junk status.    

The government still needs to refinance €82.5billion of debt maturing by the end of the year, with a big hump at the end of October, and Spain’s overspending regions have a further €15.7billion of debt maturing in the second half of 2012.    

‘We’re very close to junk bonds and we’ll end up in the junk,’ Jose Carlos Diez, chief economist at Intermoney in Madrid, said on Spanish television.     

‘In this situation, the key is to look at the reaction of investors and see if capital flight stops … If the process doesn’t stop, there will be more funding problems and what we will see is a bailout that is starting small become a big one.’