Stock markets experience short-lived surge on news of Spanish bailout

 

Euphoria surrounding a €100 billion (£81 billion) deal to rescue Spain's banks gave way to cynicism today as the gravity of the eurozone's woes weighed on the minds of investors.

The FTSE 100 Index initially jumped more than 2% on hopes the bail-out move would provide additional time for under-pressure political leaders to tackle the wider eurozone crisis.

But as the real impact of the latest EU support was fully considered, London's leading shares index pulled back, standing just 0.5% or 29 points higher.

Spain became the fourth country after Greece, Ireland and Portugal to turn to the eurozone rescue fund for financial help at the weekend when prime minister Mariano Rajoy admitted after weeks of denial that a bailout was required.

Graeme Leach, chief economist at the Institute of Directors, said: "Although the bailout will certainly help the Spanish banking system, the fundamental situation in Spain is the same this morning as it was a week ago.

"We are seeing a predictable short-term rally, but the future of the euro remains in serious doubt. All eyes this week will turn to the Greek elections.

"The domestic political situation in Greece and Spain is still likely to result in some form of eurozone break-up."

The euro remained up against the US dollar while Brent crude oil also lifted back above 100 US dollars a barrel amid hopes of improved global demand.

Financial stocks were higher in London, although did pare some gains, with Barclays shares up 2% and insurer Aviva 1% higher. International Airlines Group, which owns British Airways and Spain's Iberia, also improved 1%.

Although the situation in the eurozone's fourth biggest economy remains bleak, there are hopes that the eventual injection of support for its creaking banks will help to avoid the meltdown of the eurozone.

Chancellor George Osborne this weekend warned that the UK faces a lost decade unless the eurozone crisis is brought under control.

While the planned 100 billion euro in European Union rescue funds has eased some nerves over Spain, further storms lie ahead for the eurozone.

The next key date for the euro currency union is Sunday when Greece holds an election that is being seen as a referendum on whether to stay in the eurozone or reject painful austerity measures.

David Jones, chief market strategist at IG Index, said: "Of course, it would be a mistake to think everything is fixed. Spain's economy remains mired in recession."

A final figure on the size of the bailout will only be available later this month following the completion of two audits of the financial system.

The cash is expected to come from the eurozone rescue fund, with the International Monetary Fund overseeing the payments but not putting up any money.

The terms of the deal Spain is set to receive are likely to reassure markets because they have none of the strings attached to previous bailouts of Greece, Portugal or Ireland, when tough austerity measures were demanded.

Spain's financial problems are not due to Greek-style government overspending. Instead, its banks got caught up in the collapse of a real estate bubble in 2008 that then got worse over the next four years.

There are fears the problem will get worse as more jobless people are not able to pay their mortgages.

PA

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