Markets remain pressured by Spanish bailout fears

AP News
Posted: Jul 24, 2012 12:28 PM
Markets remain pressured by Spanish bailout fears

LONDON (AP) — Financial markets fell again Tuesday following the previous days' turmoil amid fears over a potential bailout of Spain and the future of the euro currency, which hit a two-year low.

On Monday, global stocks tanked while the euro hit a fresh two-year low against the dollar. The trigger was a rapid rise in Spain's borrowing rates to levels that are considered unsustainable in the long-run and have forced other euro countries to seek financial help.

The problem for the 17-country eurozone is that bailing out Spain, its fourth-largest economy, will cost more than double what was splashed out saving Greece, Ireland and Portugal from bankruptcy.

The pressure, as well as the focus, remains on Spain, which is struggling to get its public finances under control at a time of recession and sky-high unemployment. Mounting financial problems in the country's regions are also laying siege to the government's ability to reassure skeptical investors.

"At the moment all eyes are on the eurozone and as it continues to lurch from one catastrophe to the next expect any bounce to be short lived," said Mike McCudden, head of derivatives at Interactive Investor. "As Spain clearly cannot finance its debts while trying to stabilise the economy it is only a matter of time before we see a request for a formal bailout."

By the close on Monday, Britain's FTSE 100 index of leading British shares lost 0.6 percent at 5,499.23 while Germany's DAX fell 0.5 percent to 6,390.41. The CAC-40 in France shed 0.9 percent to 3,074.68.

Madrid's main IBEX 35 index was faring worse, shedding another 3.6 percent. The yield, or interest rate, on the country's 10-year government bonds was up another 0.10 percentage points at 7.53 percent. On Monday, it hit 7.56 percent.

The euro fell to a new two-year low against the dollar, sliding 0.5 pernce to $1.2052.

The selling pressure in Europe accelerated after a lackluster opening on Wall Street. The Dow Jones industrial average was down 1.3 percent at 12,559.99 while the broader S&P 500 index fell the same rate to 1,333.30.

Later Tuesday, Spain's finance minister Luis De Guindos is due to meet his German counterpart Wolfgang Schaeuble in Berlin. Though no press conference is scheduled, De Guindos is likely to reiterate his stance that the financial markets are acting in a disorderly manner and that Spain does not need a sovereign bailout alongside a bailout of its banks.

Schaeuble has problems of his own, too. The meeting is taking place amid concerns that Germany, Europe's wealthiest economy, is being dragged into the debt crisis. Though its economy remains strong, the demands on the German state from bailing out other countries could start to erode its own creditworthiness, according to Moody's.

Late Monday, Moody's placed Germany, as well as Luxembourg and the Netherlands, on notice for a potential downgrade. It warned of the increased likelihood of a Greek exit from the euro along with a bigger risk that a waning economy will prompt more bailouts.

Figures released Tuesday provided further evidence that the eurozone economy remains in the doldrums.

The monthly purchasing managers' index — a gauge of business activity — from financial information company Markit was unchanged at 46.4. Though in line with expectations, the index remains firmly below the 50 mark, which in effect marks the point between growth and recession.

Ben May, European economist at Capital Economics, said the survey suggests that the eurozone will contract by 1 percent his year and possibly more in 2013.

"Needless to say, this will hinder the speed of fiscal consolidation in the region and is likely to lead the debt crisis to continue to intensify," said May.

Earlier, better data on China's manufacturing helped markets find a floor though gains were muted and Japan's benchmark lost ground amid strength in the yen, which hurts its powerhouse exporters.

Preliminary results of HSBC's monthly survey of Chinese manufacturers showed the contraction in manufacturing eased in July. The bank's Purchasing Managers' Index which combines various measures of manufacturing activity rose to 49.5 from 48.2.

Japan's Nikkei 225 stock average closed down 0.2 percent at 8,488.09 while South Korea's Kospi added 0.3 percent to 1,793.93. Hong Kong's Hang Seng fell 0.8 percent to 18,903.20.

Oil prices recovered some ground following Monday's deep losses — benchmark crude for September delivery was up 20 cents at $88.34 a barrel in electronic trading on the New York Mercantile Exchange.