Lack of detail on Spain rescue spooks investors
MADRID (AP) - Investors continue to find more questions than answers in Spain's decision to seek help for its ailing bank sector and tap a 100 billion euro ($125 billion) euro area bailout fund.
The country's borrowing costs rose sharply Tuesday for the second day in a row while stocks seesawed as markets fretted about whether the new 100 billion euro lifeline is enough to contain the 17-country single currency union's debt crisis and whether private investors in Spain might not see their debts paid off.
"EU leaders continue to give their best impression of blind men groping around in the dark for a solution to the debt problems afflicting Europe," said Michael Hewson, senior market analyst with CMC Markets.
Spain bailout offers calm before more storm
Investors give thumbs down to Spanish bank rescue
The interest rate - or yield - on Spain's 10-year bond rose to 6.63 percent, close to the 7 percent level that forced Greece, Ireland and Portugal to ask for more rescues of their public finances, according to financial data provider FactSet.
Stocks slipped early on Madrid's IBEX-35 index, then turned to positive territory were up 0.9 percent in midday trading.
The bank rescue package was announced Saturday by finance ministers from the 17-country euro area, but no amount has been set for how much Spain's banks will receive. Investors are also becoming increasingly worried that private bondholders could be placed lower in the pecking order of debt repayments if money from a new eurozone rescue fund is used in the bailout.
It is not yet clear where the euro area bailout loans will come from. If the money comes from the existing eurozone rescue fund, the European Financial Stability Facility, its repayments will have the same priority as the all the other private bond investors. However, if the funds are to come from the new bailout facility, the European Stability Mechanism, its bond repayments will be given a higher priority than everyone else's - which could mean that other debt would be less likely to be paid off. That could make bondholders less willing to buy Spain's debt or demand a higher interest rate to compensate for the added risk of losses.
Spain will wait for the results of two independent audits of the country's banking industry before saying how much of the 100 billion euro it will tap. The bailout loans will be paid into the Spanish government's Fund for Orderly Bank Restructuring (FROB), which would then use the money to strengthen the country's teetering banks.
In a report released late last week, the International Monetary Fund estimated Spain needs around 40 billion euro to prop up banks hurting from an unprecedented real estate boom that went bust.
Investors also want to know whether Spain will ask for a safety margin of extra money to cushion itself against further shocks, such as a deterioration in the economy.
While Spain's bailout is designed to prop up its banks, investors are also worried that the Spanish government might eventually be forced into asking for a bailout to help it pay its way. Recession-hit Spain, which has the eurozone's fourth-largest economy with unemployment of nearly 25 percent, may be too big for the eurozone's rescue funds to handle.
Spain is also getting punished because of fears Greek elections on Sunday will hand a victory to the radical left-wing Syriza party, campaigning on a pledge to refuse to comply with terms of that country's bailout package. This could eventually push Greece out of the euro, further destabilizing the currency group.
"The idea of the Spanish bailout was to calm the market in case the Greek elections do not turn out as the EU would like," said Gary Jenkins, director of Swordfish Research Ltd.
"However the end result was to create more volatility and create more concern."
Once it became clear that the rescue money for Spain's banks would not solve that country's problems, investors have turned their attention to Italy, whose economy is larger than Spain's. Italy didn't suffer through a real estate bust, so its banks are in better shape. But like nearly half of the countries in the euro, its economy is shrinking, making it difficult for the government to chip away at a mountain of debt
"Although Italian banks are relatively sound compared to the Spanish counterparts, without the heavy weight of toxic real estate bubble and are much less exposed to the government bonds, the real question is whether the country can grow itself out of the recession," said Anita Paluch of Gekko Global Markets.
Oil hits 8-month low as Spain optimism fades
(AP) SINGAPORE - Oil touched an eight-month low near $81 a barrel Tuesday in Asia amid concern Spain's bank bailout won't be enough to stem Europe's debt crisis.
Benchmark oil for July delivery was down $1.15 to $81.55 per barrel at late afternoon Singapore time in electronic trading on the New York Mercantile Exchange. Earlier on Tuesday, oil dropped to $81.07, the lowest since October. The contract fell $1.40 to settle at $82.70 in New York on Monday.
In London, Brent crude for July delivery was down 98 cents at $97.02 per barrel on the ICE Futures exchange.
Crude jumped Monday after the 17 countries that use the euro common currency pledged to lend Spain $125 billion to rescue its faltering banks. However, attention soon turned to the Greek election this weekend, the outcome of which could determine if Greece stays in the euro.
"The initial bullish euphoria surrounding the Spanish bank bailout plan quickly wore off," energy trader and consultant Ritterbusch and Associates said in a report.
Greece will hold an election Sunday in a bid to form a government after political leaders failed to do so after a vote last month.
Oil has plunged about 24 percent from $106 since early last month amid signs of slowing economic growth in the U.S., China and Europe.
Traders will also closely watch a quarterly meeting of the Organization of Petroleum Exporting Countries on Thursday. Some members of the cartel have suggested recently that OPEC is producing too much crude, and the group could decide to cut supplies to help boost prices.
In other energy trading, heating oil was down 1.9 cents at $2.62 per gallon while gasoline futures fell 2.2 cents to $2.63 per gallon. Natural gas dropped 3.0 cents to $2.19 per 1,000 cubic feet.
Greece sees borrowing costs jump
(AP) ATHENS, Greece - Greece's debt management agency says the country has raised 1.625 billion euro ($2 billion) in an auction of 26-week treasury bills, but at a relatively hefty interest rate that rose from a similar debt sale last month.
Tuesday's auction saw the yield increase to 4.73 percent from 4.69 percent in the last such auction on May 8. Demand was 2.14 times the amount on offer, weaker than in May, when it was 2.6 times the offer.
Greece has been locked out of the long-term international bond market for the past two years by sky-high interest rates demanded for its bonds. It has continued with short-term bill sales to keep a presence in the market.
The country has been relying on international rescue loans from the EU and IMF since May 2010.
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Investors give thumbs down to Spanish bank rescue
(CBS/AP) NEW YORK - Investors aren't sold on a rescue of Spanish banks.
Stocks fell on Wall Street, an early rally faded on European stock exchanges, and borrowing costs for Spain crept higher on the bond market Monday - all expressions of doubt about the latest fix for a debt crisis in Europe.
Investors were uncertain whether the rescue package would be enough to save the Spanish banks and whether the terms of the loan, still undisclosed, would deliver another blow to the recession-hobbled Spanish economy.
"People want to see clarity," said Stephen Carl, head of equity trading at The Williams Capital Group, an investment bank in New York. "No one likes a situation that's to be determined."
Spanish bank bailout could cost $125 billion
Will Europe tip the world into recession?
Fitch downgrades two Spanish banks
European countries committed over the weekend to lend Spain up to $125 billion to distribute to its banks, which have been driven almost to insolvency from a bust in real estate prices four years ago.
Spain became the fourth European nation to seek a rescue, after Greece, Portugal and Ireland.
Market strategists had hoped that the rescue in Spain would at least temporarily ease fear that debt problems in Europe will explode into a world financial crisis and hurt the fragile global economy.
Those strategists had predicted a rally in stocks after the deal was announced. But investor relief was short-lived.
Heightening these concerns, Fitch Ratings on Monday downgraded Spain's two largest international banks Banco Santander and Banco Bilbao Vizcaya Argentaria (BBVA) from A to BBB+.
The credit rating agency said the reasons for the downgrade were primarily because Spanish sovereign debt ratings had been downgraded to BBB- from A- on June 7 and also due to forecasts that Spain's faltering economy would remain in recession throughout this year and also in 2013 "compared to the previous expectation that the economy would benefit from a mild recovery in 2013."
France's main stock index closed down 0.3 percent, and Germany's rose just 0.2 percent. Both indexes were up more than 2 percent earlier in the day. Spain's benchmark stock index shot higher by 6 percent but closed down 0.5 percent."The Spanish deal is a temporary fix," said Jim Herrick, director of equity trading at Baird & Co.
More alarming, the yield on Spanish 10-year bonds climbed 0.29 percentage point to 6.47 percent, suggesting the bond market is losing confidence in Spain's finances. The yield had fallen earlier.
Initial investor optimism was overshadowed by concerns over the terms of the deal, which were still being worked out.
Finance ministers of the 17 countries that use the euro currency said they would make the $120 billion available to the Spanish government to distribute to its banks.
Bond investors were worried that the debt from the rescue package would put additional strain on Spain's finances. The European Union made clear Monday that there would be some strings attached besides interest.
"When people lend money, they never do it for free. They want to know what is done with the money," said Joaquin Almunia, the European Competition Commissioner.
Other events in Europe also weighed on the markets. Investors are nervously awaiting an election this weekend in Greece that will help determine whether that country is forced out of the euro group.
And Italy said its economy contracted by 0.8 percent in the first three months of the year, the worst showing in three years. The Italian government is struggling to fend off the perception that Italy will be next to need a rescue.
The yield on the Italian 10-year government bond crept higher, too - by 0.29 percent from Friday to 5.84 percent.
"This deal is not the be-all and end-all that will solve Spain's or Europe's other problems," said Ryan Larson, head of equity trading at RBC Global Asset Management.
The price of oil reversed an earlier gain, falling 65 cents to $83.46 a barrel. Investors bought safer investments like U.S. Treasury notes, sending the yield on the benchmark 10-year note down to 1.60 percent from 1.64 percent Friday.
Also adding to market worries is China's economic slowdown. A large steelmaker in China, Baoshan Iron & Steel, said it lowered steel prices as demand from makers of appliances and cars slowed.
"China is a big piece of the global economic puzzle," Herrick said. "Any piece of news that comes out from there will be closely scrutinized."
The downbeat mood Monday took some sheen off the market's performance last week, when stocks recorded their strongest week of the year. News that businesses were restocking their inventories faster than expected pushed stocks higher Friday, giving the Dow Jones industrial average its fourth straight day of gains.
Spain: Stocks soar, pressure on bonds down
(AP) MADRID - Spanish stocks shot up Monday while its borrowing costs fell sharply as investors appeared relieved that Spain has secured a bailout for its banks.
In line with healthy rises in stock exchanges across Europe, the Ibex-35 stock index was up 4 percent about 90 minutes after the opening bell. Bank stocks rose strongly. Shares in Bankia, which had requested 19 billion euro in aid to cover its bad loans and assets, rose about 15 percent.
The interest rate on Spanish 10-year bonds - an indicator of investor confidence of how well Spain can maintain its debts - down as much as 8 basis points to about 6.1 percent.
Eurozone finance ministers said Saturday they would make up to 100 billion euro ($125 billion) in loans available to the Spanish government to prop up banks laden with non-performing loans and other toxic assets after the collapse of a real estate bubble. Spain has yet to say how much of this money it will tap.
When the bailout was announced on Saturday, Spanish Economy Minister Luis de Guindos said the rescue would not force any new austerity measures on the Spanish government, already struggling to chip away at a bloated deficit in the face of a recession and nearly 25 percent unemployment.
And speaking to reporters Sunday, Prime Minister Mariano Rajoy avoided using the term "bailout" to describe the aid, calling it instead a credit line without the strict austerity conditions that have accompanied bailouts for Greece, Portugal and Ireland.
However, on Monday the EU made clear the money is more than just a loan. Besides being paid back with interest, there will be strings attached for the Spanish government.
"When people lend money, they never do it for free. They want to know what is done with the money," said Joaquin Almunia, the European Competition Commissioner.
"I am not talking about the just the obligation to pay back the money, but also some other kind of terms," he told Cadena Ser radio, adding that these remain to be determined.
The loan will be supervised by the European Commission, the European Central Bank and the IMF, Almunia said.
A European Commission spokesman, Amadeu Altafaj, told Spanish state television that this troika will have people on the ground overseeing the restructuring of the Spanish financial sector.
He noted that last month the European Commission recommended Spain undertake further reforms such as speeding up the phasing of a higher retirement age - it is to go from 65 to 67 - and raise VAT sales tax. The newspaper El Pais quoted EU officials Monday as saying these changes and others are part of the conditions that come with the bank rescue package.
Italy stuck in deep economic recession
(AP) MILAN - Official statistics confirm that Italy's economy contracted by a quarterly rate of 0.8 percent in the first three months of the year, the worst contraction in three years.
The painful recession keeps pressure on Premier Mario Monti's government, which is struggling to fend off the debt crisis and the perception that Italy could be next to seek a bailout following Spain's decision over the weekend to ask for help for its ailing banks.
The ISTAT statistics agency says the contraction is the worst since the first quarter of 2009, when the economy contracted by 3.5 percent. ISTAT forecasts that the Italian economy will contract by 1.3 percent this year, slightly more than the government's estimate of 1.2 percent.
Spending by families is down significantly.
Spain rescue sends world stocks surging
(AP) BRUSSELS - A European agreement to bail out Spain's banks sent stock markets surging Monday, but analysts warned that the deal doesn't solve all of the continent's problems, and the goodwill could be short-lived.
Finance ministers from the 17 countries that use the euro said they were willing to lend Spain up to 100 billion euro ($125 billion) 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 cheered by the fact that it was finally owning up to needing help.
In Europe, France's CAC-40 rose 2.1 percent to 3,115, while the DAX in Germany surged the same rate to 6,262. The FTSE index of leading British shares was up 1.3 percent to 5,508. Spain's Ibex rose by an even stronger 2.5 percent.
Will Europe tip the world into recession?
Europe debt meltdown: How did we get here?
The euro, which had surged over the weekend on news of the Spanish aid deal, gave up some of those gains, trading 0.5 percent lower at $1.2576 on Monday.
Stock markets in the U.S. were also set to open higher. Dow futures were up 0.8 percent to 12,604 while S&P futures rose 0.8 percent to 1,332.
Asian stocks gained ground 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 percent to close at 8,624.90. South Korea's Kospi added 1.7 percent to 1,867.04 and Hong Kong's Hang Seng added 2.4 percent to 18,953.63. Benchmarks in Singapore, Taiwan, mainland China, Indonesia and New Zealand also rose.
"The decision to grasp the nettle looks set to be greeted positively by the markets for the time being, but it is likely to be no more than a relief pop," said Michael Hewson, an analyst at CMC Markets. "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."
With Spain taken care of for the moment, investors will now turn their attention to the thornier issue of Greece, where voters head to the polls this coming weekend in an election likely to determine whether the debt-mired country will stick with the common currency. If Greece leaves the euro, that will raise questions of whether other countries might, too.
The Spanish rescue plan also doesn't address other critical issues.
Take Italy, for example: Government debt in the third-largest euro economy continues to pile up as its economic growth stagnates. Some fear it is only a matter of time before Italy becomes the next country to ask for rescue money.
"I think it's only a brief respite for the markets," said Tom Kaan of Louis Capital Markets in Hong Kong. "The ?,?100 billion bailout is hopefully setting up a firewall against a much worse deterioration. Here we are, saving the banks. But what is next?"
Spain is the fourth euro nation to seek a rescue, after Greece, Portugal and Ireland. A financial crisis has gripped Spain since 2008, when a real estate bust caused big losses for many banks.
The rise in equities also drove oil higher. Benchmark oil for July delivery was up 92 cents $85.02 per barrel in electronic trading on the New York Mercantile Exchange.
Cameron says euro crisis requires "urgent action"
(AP) BERLIN - Britain's prime minister is urging eurozone nations to act swiftly and take bold steps to tackle the crisis engulfing their single currency.
David Cameron, speaking alongside German Chancellor Angela Merkel, said that "urgent action is needed to deal with the market uncertainty."
He says the eurozone must become yet more integrated and consider more joint liability, such as a banking union.
While he stressed further integration was crucial for the currency bloc's stability, he left no doubt that Britain - which doesn't use the euro - expects the eurozone to tackle its own problems. He said he could not ask British taxpayers to guarantee "Greek or Spanish bank deposits."
Merkel stressed European nations must trim their debt burden in order to create more jobs and achieve sustainable growth.
China rate cut, Fed stimulus hopes boost markets
(AP) LONDON - Global markets rose on Thursday, boosted by China's decision to cut interest rates, speculation Europe is preparing to give Spain financial aid and hopes that the Federal Reserve will consider new support for the U.S. economy.
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European Central Bank leaves benchmark rate unchanged
(AP) FRANKFURT, Germany - The European Central Bank has left its benchmark interest rate unchanged as it increases the pressure on eurozone governments to tackle the debt crisis that threatens the global economy.
The decision Wednesday by the bank's 23-member governing council left the refinancing rate at a record low 1 percent.
The bank is under pressure to stimulate a weakening eurozone economy with a rate cut. But bank President Mario Draghi has said the central bank cannot make up for inaction by governments.
Draghi told European politicians in Brussels last week that the euro's basic setup is "unsustainable" and urged them to sketch out a long-term vision for strengthening the framework of the shared currency.
While it tries to squeeze more effort from government, the ECB is facing a weakening economy in the 17 countries that use the euro. Surveys of economic activity and business confidence have pointed sharply down, suggesting that the mild contraction of 0.3 percent predicted by the European Commission will turn out to be worse. That would argue for lower interest rates that would in theory make borrowing cheaper for businesses so they could expand and hire.
The ECB has already taken strong action to stimulate credit and borrowing by cutting rates to record lows and loaning 1 trillion euro in emergency credit to banks. Yet borrowing has not picked up, the banks says, because businesses see no prospect of growth and profit.
European leaders including Draghi are working on proposals ahead of a crucial June 28-29 summit where leaders from across Europe will be under pressure to stop the 17-country eurozone from falling apart.
Eurozone leaders face trouble on several fronts. Spain is struggling to bail out banks that made reckless loans during a real estate boom and are now suffering mounting losses. Greece, already rescued by expensive bailout loans from the other countries, faces elections June 17 that could result in rejection of the strict cutbacks demanded under its bailout. That could lead to a chaotic exit from the euro.
Trouble in one place could spread to other countries in the form of investors selling assets and bank customers withdrawing deposits for fear banks will collapse or their savings will be redenominated in a new currency after euro exit. Finance ministers from the Western industrial countries held a conference call Tuesday to discuss the eurozone crisis.
A renewed financial crisis in Europe could hurt growth in the United States and Asia by creating losses and fear among banks, which are key to the functioning of the global economy, and by hurting trade.
The measures to be discussed at the summit at the end of June could include: a Europe-wide bank regulator and bailout fund with powers to take over and restructure banks, further steps to increase growth, moves toward more control over national government's spending and some form of shared borrowing to reduce the chance that one country would default.
Most of those steps would take years to implement and several are highly controversial. Germany has resisted common borrowing through so-called eurobonds, afraid spendthrift countries would overborrow using its stronger credit rating. A plan for stronger control of countries finances might ease that objection, however.
Officials from the European Union's executive, the commission, unveiled their legislative proposals earlier Wednesday designed to strengthen the eurozone's ability to restructure troubled banks. However Wednesday's proposals, not expected to come into power until 2018, fall short of the full banking union pushed for by some European officials.
German industrial output drops more than expected
(AP) BERLIN - Industrial production in Germany dropped by an unexpectedly sharp 2.2 percent in April compared with the previous month, official data showed Wednesday, sending a downbeat signal about the economy's ability to shrug aside the eurozone debt crisis.
The decline was led by a 3.6 decrease in production of capital goods such as factory machinery and a 3.7 percent fall in production of consumer goods, the Economy Ministry said.
The drop followed a 2.2 percent month-on-month gain in March - a figure that was revised sharply downward from the initial reading of 2.8 percent.
The Economy Ministry said that industrial production remains "very robust." It said one factor in the decline was the fact that April 30, the day before the May Day holiday, fell on a Monday - meaning that many people took the extra day off.
Carsten Brzeski, an economist at ING in Brussels, took a less rosy view.
"The German economy's immunity against the eurozone sovereign debt crisis is clearly fading away," he said, pointing also to shrinking order books and a recent drop in business confidence.
"Even if it will not fall, the eurozone's last stronghold is faltering," Brzeski added. "For the time being, it is a stabilization at a high level. However, latest data clearly indicate that Germany is not an economic island."
In year-on-year terms, industrial production was down 0.7 percent in April following a 1.4 percent gain in March.
Germany, Europe's biggest economy, so far has been relatively unaffected by the debt crisis afflicting many partners in the 17-nation eurozone. Quarter-on-quarter growth of 0.5 percent in Germany in the January-March period helped the eurozone narrowly avoid a recession.
Market pressure on Spain eases amid hopes for help
(AP) MADRID - Spain's borrowing costs edged lower Wednesday on hopes that the European Union may be moving closer toward adopting measures that could alleviate the country's financial crisis.
The interest rate - or yield - that Spain would have to pay on its 10-year bonds was at 6.22 percent in midday trading, nine basis points below it closing figure Tuesday, according to financial data provider FactSet. The spread, or difference, with the equivalent safe-haven German yield fell below 5 percentage points for the first time in more than a week.
The drop in yields comes a day after the most explicit suggestion from the Spanish government that it is seeking help from Europe for its struggling banks as a finance minister said that the country risks losing access to the financial markets.
Desperate Spain seeks international aid for banks
Spanish pull money from banks at record pace
Finance Minister Cristobal Montoro warned Tuesday that the high risk premium of recent week indicated "the door to the markets is not open for Spain."
Meanwhile, Spanish Prime Minister Mariano Rajoy pleaded with European leaders "to support those that are in difficulty" and push toward greater fiscal unity - a step that might allow its troubled banks to get direct financial help. The call comes although Spain insists it doesn't need outside aid.
European leaders are to hold a summit at the end of June to lo at ways to stop the 17-country eurozone from collapsing. The European Commission and the European Central Bank are expected to present measures at the meeting for creating a "banking union" that would oversee banks and possibly offer bailouts directly, bypassing national governments.
Spain has been the focus of investor concern that the country would soon need to seek an international bailout if its public finances become overwhelmed by the cost of rescuing its banks, which are sitting on massive amounts of soured property investments following the bursting of a real estate bubble
At the end of May, Spain's most stricken lender, Bankia S.A., said it needed 19 billion euro ($23.62 billion) in government aid to shore up its finances against losses on its toxic home loans. But Spain only has 5 billion euro left in a 19 billion euro fund that it established in 2009 to help banks. The government has promised to help Bankia but has not mapped out a plan.
These concerns have sent the yield on Spanish debt to dangerously high levels and close to the crucial 7 percent ceiling - a point at which other eurozone countries such as Greece, Ireland and Portugal sought a bailout. The country has become the focus of Europe's debt crisis because bailing out the eurozone's fourth-largest economy would stretch the region's finances to breaking point.
Spain is eager for its banks being able to seek help on their own because if the government were to ask for it from the EU bailout fund, it would essentially constitute the beginning of a bailout. This international assistance would come with strings attached - its fellow countries in the 17-nation eurozone and the International Monetary Fund could impose certain policies on the Spanish government, something the country is keen to avoid.
But Germany appeared to pour cold water over Spain's maneuvers with Volker Kauder, parliamentary leader of German Chancellor Angela Merkel's conservative bloc, telling ARD television Wednesday that the Spanish government must tap the eurozone rescue fund to help its troubled banking sector because the money cannot go straight to a Spanish bank rescue fund. Kauder said there is discussion over whether aid could go directly to a Spanish bank rescue fund - but "I don't see this possibility."
He said the rules of the European Financial Stability Facility allow only for a country to apply.
The Spanish government has said that the amount of money needed to prop up its troubled banking sector is not excessively high and would be easily manageable under a system of greater Europe banking unity. Estimates have put the cost of a complete bailout for the Spanish banking sector between 40 billion euro and 100 billion euro.
Economy Minister Luis de Guindos said Wednesday the International Monetary Fund report on Spain's banks is due June 11 while two international auditing firms contracted to study the sector's health will report at the end of June.
