'Spailout' bank deal heartens stock and bond markets

Investors have welcomed a deal agreed over the weekend to prop up Spain's banks with a giant loan package.

by Michael Northcott
Last Updated: 19 Aug 2013

Markets in Europe, Asia and the US rose sharply in morning trading today after eurozone leaders agreed bailout loans for Spain’s troubled banking industry. Following another hair-raising chapter in the European debt saga, investors have rallied on seeing Spain’s financial sector brought back from the brink of collapse. In early trading today, London’s FTSE 100 rose 1.6%, the Cac 40 in Paris rose 2.2%, and in Madrid, the Ibex rose 4.4%.

Eurozone leaders agreed the bailout over the weekend after Friday afternoon rumours circulated that Spain was drafting a plea for loans to save its embattled banks. The loans totalled €100bn (around £80bn), and should help prop up the sector, which is in dire straits because of a property boom that had its bust in 2008. Banks wanting to get their hands on some of the bailout money will need to present restructuring plans to the EU.

None of this is a ‘silver bullet’ solution however: Spain’s wider economy remains in one of the most difficult predicaments seen across the EU. Unemployment is at its highest since records began at 24%, and the government has even been selling off military hardware such as battleships to make an extra few mill. Analysts say that if things carry on in this way, the country’s debt will fast reach the critical ratio of 90% of GDP, widely seen as the point at which lenders spurn a country’s bonds. Then the proverbial really would hit the fan…

In a further sign that markets remain short-termist in their approach, however, the yield of Spanish 10-year bonds has dropped back below 6%, into the safe zone. But as Spain’s prime minister said this morning, ‘This year is going to be a bad one’. The country’s economy is set to contract by 1.7%, plunging Spain further into its double-dip recession, and meaning there is a pretty vanishing chance of Europe’s fourth largest economy coming out of the dark any time soon. Propping up the banks is definitely preferable to complete collapse of such a large economy, but the volatility of the markets shows no one feels a solution has really been reached. The saga continues…

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