Bank shares suffer over Spain fears

Fresh fears about the Spanish economy triggered a pummelling for bank shares today as markets failed to make meaningful gains following Greek elections.

The FTSE 100 Index surged more than 1% in early trading after pro-bailout party New Democracy secured a narrow win in yesterday's vote, giving the embattled country more time to remain in the eurozone.

But any benefit proved short-lived as uncertainty over whether the party would forge a coalition Government combined with a worrying rise in Spain's borrowing cost to levels that forced Greece, Ireland and Portugal to seek bailouts.

Royal Bank of Scotland was down 5%, with Barclays and Lloyds suffering hefty falls, after Spain released data showing that the amount of risky loans in its banks hit 18-year highs.

The FTSE 100 Index surrendered most of its earlier gains to finish up 12.3 points at 5491.1. The Dow Jones Industrial Average in the US was down 0.3% as the London market closed.

Michael Hewson, senior market analyst at CMC Markets, said: "The reality remains that Greece's fiscal position remains unsustainable and, more than that, the continued deterioration in the viability of Spanish banks continues to worry markets."

Following the Greek elections, New Democracy, led by Antonis Samaras, will seek to form a coalition government after it secured 29.7% of the vote against anti-austerity group Syriza's 26.9%. World leaders have urged Athens to act quickly.

Greece has had to adopt a range of far-reaching austerity measures as a condition of receiving rescue loans from the European Union and International Monetary Fund.

Without the EU bailout cash, Greece would go bankrupt and probably have to leave the 17-country bloc.

But uncertainty remains over how and when a coalition government will be formed - and whether it will last.

Graeme Leach, chief economist at the Institute of Directors, said: "Don't be deceived into thinking the political and economic fundamentals in Greece have changed with the election result.

"They haven't. The day of reckoning has merely been delayed slightly."

As well as Spain, Italy saw its borrowing costs push higher as well, with interest rates sitting above the 6% mark.

PA