Euro Zone Crisis

European stocks slide on Spain bailout fears

PUBLISHED : Wednesday, 26 September, 2012, 9:15pm
UPDATED : Wednesday, 26 September, 2012, 9:15pm

European stock markets and the euro slumped on Wednesday as investors increasingly anticipated a full bailout of Spain, and owing to falling confidence in the US Federal Reserve’s latest stimulus plan.

Madrid’s IBEX 35 index tumbled 3.41 per cent to stand at 7,895.5 points in afternoon trading, while in London the FTSE 100 index of top companies shed 1.19 per cent to 5,789.58.

Frankfurt’s DAX 30 lost 1.73 per cent to 7,295.92 points and in Paris the CAC 40 dived 2.29 per cent to 3,433.42. Milan and Lisbon each retreated by about 3.0 per cent in value.

Markets braced for a request by Spain for financial aid, after Spanish Prime Minister Mariano Rajoy told the Wall Street Journal that Spain would seek a full state bailout if its borrowing rates stayed at unsustainable levels.

“It can only be a matter of time before Spain is forced into a bailout request,” said Michael Hewson, senior analyst at CMC Markets trading group.

Spain has cut a deal with the European Union for a rescue loan of up to 100 billion euros (US$125 billion) for banks hobbled by bad loans extended before a 2008 property market crash.

But it has refused to be rushed into seeking a full-blown sovereign bailout until it knows the conditions. To avert such a rescue, Spain’s government was on Thursday set to unveil new cost-cutting measures.

Ahead of the austerity budget announcement, Madrid on Wednesday defended police who beat and fired rubber bullets at protesters angry at its economic management.

The Madrid protests increased the pressure on Rajoy, who is already grappling with a fresh surge in borrowing costs and with pro-independence stirrings in Catalonia, which has called snap elections.

The country’s central bank meanwhile said that Spain’s recession was deepening, with economic output sliding at a “significant pace” in the third quarter of this year.

Against such a bleak outlook, the interest rate on Spanish 10-year sovereign debt rose back above six percent – a level seen as being unsustainably expensive.

“We are seeing risk sentiment corrode across global markets as questions regarding the effectiveness of recent central bank policy action and persistent fears over the situation in the euro zone peripheral together have punched market sentiment back down to the ground,” said Ishaq Siddiqi, market strategist at ETX Capital traders.

A Federal Reserve official’s doubts about the impact of the Federal Reserve’s third quantitative easing (QE3) programme since the financial crisis hit US stock markets on Tuesday and dragged down Asian share prices Wednesday.

Charles Plosser, head of the Fed’s Philadelphia branch, said he was doubtful the QE3 bond-buying programme announced this month would have great impact on charging up the US economy, and warned that the Fed could lose credibility.

“Plosser put the cat among the pigeons,” said IG Index market analyst Chris Beauchamp, adding that “investors don’t like to see the QE rescue plan questioned.”