Sceptics turn against Spain bailout hopes as the rally falters

Bond markets fall back after initial euphoria and European Central Bank gets tough on clearing up huge property debt

The dramatic €100bn (£81bn) bailout for Spain's struggling banks was under immediate pressure yesterday as sceptical bond markets turned on Madrid and the European Central Bank urged more action on clearing up billions in sour property debt.

Spain's Prime Minister, Mariano Rajoy, who initially claimed victory in securing the rescue without further austerity and humiliating oversight, also faced a political blow as it emerged that financial assistance would be supervised by the so-called troika of the IMF, European Commission and ECB.

The latest developments came against a turbulent market backdrop as euphoria over the bailout quickly gave way to doubts over the long-term effectiveness of the rescue. Spain and Italy benefited from falling debt costs early on, but a sudden U-turn by markets spooked by a lack of detail saw the borrowing costs of both nations surge again later.

Spain's benchmark 10-year yields swung wildly from below 6 per cent to as high as 6.47 per cent in a volatile session. Big early gains for global stock markets were also pared back as doubts over the deal grew, with London's FTSE 100 eventually closing down 2.7 points at 5,432.37.

Analysts said a key unanswered question was whether the funds will come from the original European Financial Stability Facility bailout pot, whose debt is ranked equally with sovereign debt holders, or the new European Stability Mechanism. If the money comes from the ESM, this debt takes priority, leaving Spanish bondholders potentially exposed to losses in a default.

Michael Symonds, financial analyst at Daiwa Capital Markets Europe, said: "The brevity of the rally in risk assets simply goes to highlight how the breadth of challenges facing Spain and the euro area extends far beyond the solvency of the Spanish banking sector. It also emphasises the lack of detail so far in the announced reforms, in particular the uncertainty over the potential for the euro area's bailout loan to subordinate existing Spanish government bondholders."

Madrid also faced pressure from the ECB to strengthen its plans to create "bad banks" where the lenders would park toxic property loans to sell them off. Spain's banks are laden with €184bn in "problematic" property loans according to the Bank of Spain, and the creation of separate asset management companies for the loans is seen as crucial to clearing up the mess.

"It remains unclear...whether the envisaged framework is sufficient to achieve an effective separation of the risks of banks," the ECB warned yesterday. Its legal opinion is a blow for Spain, which is likely to be forced to review the reform. The ECB also wants the Spanish government to make clear how the bad banks will be funded and whether they will be backed by state guarantees.

Mr Rajoy's claims that Madrid will not be subject to outside supervision were immediately quashed by EU Competition Commissioner Joaquin Almunia, who said the troika would oversee financial assistance.

Mr Almunia said the IMF would be fully involved in monitoring Spain's programme even though it was not contributing funds, and banks that received ai d must present a restructuring plan. "Of course there will be conditions. Whoever gives money never gives it away for free."

Ireland's leadership was also fighting to rebut claims that Spain had secured a better bailout deal than its own rescue in November 2010. Deputy finance minister Brian Hayes said: "They got the exact same deal that we got."

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent