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Global Markets Tank as Spain Woes Deepen

Wednesday, 30 May 2012 07:00 AM

Mounting concerns about Spain's worsening economic and financial condition and doubts over Europe's ability to bail the country out dragged stock markets and the euro sharply lower Wednesday.

Over recent weeks, Spain has competed with Greece as the main source of worry over Europe's debt crisis. Its banking system is under the microscope, especially after Bankia, the country's fourth-largest lender, last week announced it needed 19 billion euros ($23.8 billion) in state aid.

Investors are worried that Bankia's woes might be replicated across Spain's banking sector, which has suffered badly from the collapse of the construction sector. An economic recession and unemployment at almost 25 percent are fueling concern that the country will become the fourth euro country to be bailed out after Greece, Ireland and Portugal.

"Without wishing to sound apocalyptic, it does feel as if Spain is gradually shuffling towards the abyss," said Chris Beauchamp, market analyst at IG Index.

The unease hit stocks hard Wednesday, particularly in Europe. The FTSE 100 index of leading British shares was down 1.5 percent at 5,310 while Germany's DAX was 1.1 percent lower at 6,326. The CAC-40 in France fell 1.3 percent to 3,045.

Wall Street was poised for falls too, with both the Dow futures and the S&P 500 futures down 0.9 percent.

The problem for the 17-country eurozone is that Spain's economy alone is double the size of the three countries already bailed-out, and investors are skeptical whether a rescue operation can be mounted.

Spain's stock market has been one of the worst-performing in the world this year — down another 2.1 percent Wednesday — and the country's cost of borrowing has ratcheted higher to alarming levels. At 6.61 percent, another 0.19 percentage point higher Wednesday, the yield on the benchmark ten-year bond is near levels that eventually forced the other bailouts. The spread, or difference, between the interest rates being charged for Germany and Spain is around 5.3 percentage points, around the levels touched when the other bailouts were needed.

"Spain could prove beyond Germany and other northern countries' capacity to rescue, and its collapse would spell the end for the euro," said Peter Morici, a professor at the University of Maryland.

The euro has also taken a battering and is now trading around two-year lows against the dollar. It fell another 0.4 percent to $1.2437, further pressured by figures from the European Commission showing that economic confidence in the eurozone slumped to around a two and a half year low in May.

The euro's ability to survive will also be affected by developments in Greece, where a general election on June 17 is widely-considered to be a referendum on whether the country should remain in the currency bloc.

Though some European politicians say the eurozone can survive a Greek exit from the currency union, many experts warn that the actual impact on the the continent's economies and markets remains unclear.

Earlier, Asian markets likewise fell on worries over Spain, though a report that China has no plans for a major economic stimulus weighed heavy, too.

Japan's Nikkei 225 index fell 0.3 percent to close at 8,63319 as Europe's troubles sent the yen higher against the euro. That hurts Japanese exporters by making their goods more expensive.

Hong Kong's Hang Seng tumbled 1.9 percent to 18,690.22 and South Korea's Kospi was down 0.3 percent to 1,844.86.

Oil prices fell amid worries over the repercussions in Europe. Benchmark oil for July delivery was down 98 cents to $89.78 a barrel in electronic trading on the New York Mercantile Exchange.


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