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Spain's stock market reacts to EU-funded bank rescue

posted 11 Jun 2012, 04:10 by Mpelembe   [ updated 11 Jun 2012, 04:11 ]

The Spanish stock market sees a recovery after Euro zone finance ministers rush Spain into an EU-funded rescue for its debt-stricken banks.

Shares and the euro rose and safe-haven debt fell on Monday (June 11) after a bailout for Spain's banking sector eased concern about its ability to survive the euro zone debt crisis.
Over the weekend, euro zone finance ministers agreed to lend Madrid up to 100 billion euros ($125 billion) for its bank rescue fund, more than an initial audit suggests it is likely to need.

The news prompted investors to scoop up battered financial shares with Banco Santander surging 5.7 percent and Spain's IBEX - by far the worst performer in 2012 among European indexes - was up 4.1 percent.

Spain's Prime Minister Mariano Rajoy said he had pushed hard to obtain the loans which are part of a wider government plan to put the country back on track to growth.

He also said the rescue of the banks coupled with wide-ranging reforms he implemented in the last five months had saved the country from a fully-fledged bailout.

However, analysts are sceptical that the plan will be enough to alleviate Spain's funding woes and the euro zone debt crisis.

"We are not out of the woods at all. This is just a starting point and, well, I'm not very optimistic, frankly," said analyst Miguel Murado.

He said the bank rescue may only bring brief respite to Spain's economic woes.

"In the long-term, though, in the case of Spain, the main worry is the deficit because we have to hit this very difficult, I would say almost impossible, deficit target that has been set by Brussels. If we don't hit that at the end of the year, we will be again in trouble, because once again there will be talk of Spain becoming insolvent, there will be again distrust in the markets. That is the main worry in the long-term."

Rajoy, has been applauded in Europe for steep cost-cutting to bring down the country's high budget deficit, and for a series of reforms to improve economic competitiveness, such as cutting statutory severance pay.

And some people on the streets of Madrid seemed relieved at the news of the bank rescue.

"I think we are in a better situation than two weeks ago and this monetary injection into the banks is a good sign, but now we will have to see how we manage to make it work and if we can get the most out of it," said Elena.

But many Spaniards have heaped scorn on Rajoy for portraying the rescue as a triumph and have expressed scepticism about whether the plan will work.

With the economy contracting, one in four workers out of a job, and Greek elections next weekend overshadowing the entire euro zone, Spaniards accepted that Saturday's announcement of the bank rescue was necessary but many doubted it would solve the problems of Spain or the euro.

Spain is now the fourth euro zone country to seek international aid in the two-and-a-half-year debt crisis.