Fear of Spanish debt contagion sends markets tumbling
Wednesday, May 26, 2010 @ 11:44 AM
Europe's stock markets became a sea of red today as traders fretted about the state of several eurozone economies and the dreaded word "contagion" was bandied around dealing rooms across the continent.
Spain was particularly badly hit. Investors doubt whether the government will honour its pledge to cut its budget deficit and question whether its faltering economic growth will be enough to sustain debt payments. The Ibex index of Spain's most heavily traded stocks plunged by 3%, more than other European indexes, as the Spanish treasury was forced to offer investors a better return to get the sale of a fresh tranche of government bonds away.
Spain sold €2bn (£1.7bn) of six-month bills, paying an interest rate of 1.2%. Just last month the rate was 0.7%, showing how quickly concerns about Spain's ability to cope with its deficit have ballooned.
The country is at the centre of the storm after its central bank seized control of CajaSur, a small, southern savings bank hit by the property collapse.
"CajaSur's seizure by the Bank of Spain over the weekend, though of no systemic importance, has highlighted Spain's collapsing property market and the exposure of the banking system to the ailing domestic economy," said Gavan Nolan, a credit analyst at Markit. "But it served as a reminder than the effects of Spain's bubble economy bursting have still to be played out, and other savings banks are expected to run into difficulties."
Across Europe, markets went into reverse with Germany's DAX index losing 2.3% and France's CAC-40 plummeting 2.9%. Watching from the other side of the Atlantic, where the Dow Jones slumped at the opening, one New York stock exchange floor trader summed up the situation: "It seems like the Europeans are playing 'tag, you're it'.
"First it was Greece and now it's maybe Spain or Portugal. We know someone else is next."
Read more at Guardian.co.uk