Markets cautious over Spain fears

European markets remained in a fragile mood today with the euro dropping to near 11-month lows on concerns about Spain's ailing banking sector following the announcement of bailout plans for troubled lender Bankia.

Spain's main stock index closed at an almost nine-year low and interest rates on the government's 10-year bonds rose on concerns about the government's ability to sort out the country's banking industry.

Trading volumes, however, were low as Wall Street remained closed for the Memorial Day holiday.

Nationalised lender Bankia, Spain's fourth largest lender, announced late on Friday that it needed 19 billion euro (£15 billion) in state aid to shore itself up against its bad loans - a far bigger bailout than expected.

Spain's prime minister, Mariano Rajoy, said to that the government had no choice but to bail out Bankia, which has been crippled by Spain's real estate crisis.

"We took the bull by the horns because the alternative was collapse," said Rajoy, stressing that Bankia clients' savings were now safer than ever.

Spain's main IBEX 35 stock index closed down 2.17% to hit an almost nine-year low of 6,401.20. Fears over Spain's ability to finance the bailout sent yields for Spain's 10-year bonds on the secondary markets up to 6.45% - a high for the year to date and close to the key 7% rate beyond which long-term financing on the bond markets is considered unaffordable.

Other European stocks indexes also mostly fell. France's CAC-40 closed 0.2% lower at 3,042.97 and Germany's DAX dropped 0.3% to 6,323.19 after modest gains in the morning. Britain's FTSE 100 rose 0.1% to 5,356.34.

In currencies, the euro dropped from 1.2578 US dollars on Friday to near 11-month lows of 1.2531 US dollars today. The dollar fell to 79.45 yen from 79.66 yen.

Despite the gloom surrounding Spain, investors found some cheer on weekend opinion polls that strengthened hopes of Greece sticking with the euro and the austerity measures of its bailout plan.

The likelihood of Greece leaving the eurozone has been growing steadily since early May, when political parties opposed to the harsh terms of the country's financial rescue received unexpectedly high support in polls.

The Greek exit would extend financial turmoil in the country and spread financial difficulties to other nations using the euro.

Surveys over the weekend showed that Greeks, while angry after more than two years of austerity measures that have produced lower pensions and higher taxes, still want Greece to keep the euro currency and not revert back to the drachma.

The May election results were so splintered that they left the country without a coalition government. Another election has been set for June 17.

Ric Spooner, chief market analyst at CMC Markets in Sydney, said it made sense for investors to remain subdued this far ahead of the election.

"The response has so far been very muted because these things could easily wax and wane over the course of the next two weeks," said Mr Spooner. "One of the key drivers for investors will be trying to assess what the outcome of Greek election may be."

Moscow-based investment bank Troika Dialog warned in a note to clients that "given the large number of very uncertain events on investors' watch list, any rebound will be modest".

In Asia, stock markets closed modestly higher. Japan's Nikkei 225 index swung between gains and losses before settling 0.2% higher at 8,593.15. Hong Kong's Hang Seng added 0.5 % to 18,800.99. Australia's S&P/ASX 200 rose 1%.

In mainland China, the Shanghai Composite Index climbed 1.2% to 2,361.37 and the smaller Shenzhen Composite Index shot up 1.4% to 948.42.

AP