Spanish Bailout Fails To Ease Investor Concerns As Stocks Fall
Despite the $125 billion bailout for Spanish banks, the European debt crisis loomed ahead on Monday as the stock market proved yet again that it can't be fooled: New debt doesn't fix old debt.
While stocks rose temporarily during the first hour of trading-- undoubtedly a response to the Spanish banks' bailout plan announced over the weekend-- the flicker of hope was extinguished as quickly as it was lit.
The New York Times reported: "It was the first time the euro zone had acted preventively to assist a member state before it was shut out of the markets. That was a shift from the past, in which Germany, the paymaster of the European Union, insisted that any bailout be a 'last resort,' and it perhaps denoted a new flexibility in the euro zone’s crisis management — or a realization that acting fast could save money down the line."
But investors weren't as optimistic.
The Washington Post revealed that many investors worry Spanish banks will be unable to pay the new loans, and if they can't, the government would be at fault and at risk. Spain is currently enduring its second recession in three years with a 25 percent unemployment rate.
“We doubt that (the €100 billion bailout) is the only support that the country will need,” said Jonathan Loynes, chief European economist at Capital Economics in London, according to The Washington Post. “The poor economic outlook will also maintain concerns that Spain will at some point require a government bailout, too.”
On Wall Street, the European investors' reactions proved to be of little surprise, Reuters reported:
- "This is a realization that Spain, while providing money for its banks, is going to add to its debt-to-GDP ratio, and it's going to potentially subordinate some of the current Spanish sovereign debt, which doesn't make those bond holders happy," said Paul Zemsky, head of asset allocation at ING Investment Management in New York.
- "They're borrowing more money, not doing anything about growth," Zemsky said. "Today we're not worried about Spain's banking system falling off a cliff, but other than that, nothing has changed."
Spain's two largest international banks also got downgraded on Monday, according to USA Today:
- On Monday, Fitch ratings agency says it has downgraded Spain's two largest international banks Banco Santander and Banco Bilbao Vizcaya Argentaria (BBVA) from A to BBB+.
- The agency said the reasons for the downgrade were primarily because Spanish sovereign debt ratings had been downgraded on June 7 to BBB- from A- and also due to forecasts that Spain's faltering economy would remain in recession throughout this year and in 2013 "compared to the previous expectation that the economy would benefit from a mild recovery in 2013."
Speculation of Spain's corrupt bank practices has also come to light and is currently under investigation. Spanish leaders are also working to "sugar-coat" the bailout. According to The Daily Beast, Spanish Prime Minister Mariano Rajoy preferred the term: "European line of credit."
Whatever he choses to calll it, the bailout will undoubtedly come with attachments:
- “The euro group doesn’t say it explicitly, but they will be watching Spain closely in the future,” said José Ignacio Torreblanca, a senior research fellow at the European Council on Foreign Relations, to The Daily Beast. “In practical terms, there will be pressure if they don’t like what Spain is doing.”
Not to be outshined— Greece continues struggling with its own financial woes as its elections approach next week- and with it- the tension of whether the new government officials will refuse the terms of its $170 billion rescue package and cause Greece to leave the Eurozone.
Reach Managing Editor Paige Brettingen here.