Spain markets slump, ECB fails to halt debt concerns

4th August 2011, Comments 0 comments

Spain's debt risk premium surged anew and stocks plummeted Thursday as the European Central Bank appeared unable to halt a widening eurozone debt crisis.

Just as Madrid congratulated itself for raising 3.3 billion euros ($4.7 billion) in a bond auction, albeit at higher rates, European authorities seemed to whip up market fears again.

In Frankfurt, ECB president Jean-Claude Trichet announced a new window of six-month financing for hard-pressed banks.

He also signalled that the central bank for the 17 nations that use the euro would buy wilting eurozone sovereign bonds, responding to widespread calls for tough action to halt the turmoil.

But analysts said there were signs the bank was buying only Portuguese and Irish debt, and they noted Trichet failed to state clearly that it would purchase Spanish and Italian bonds.

"The market was very volatile when Trichet was speaking," said Nuria Garcia, analyst with Spanish broker Ahorro Corporacion.

"He gave a very ambiguous message in my opinion, what he said was that the situation is very delicate," Garcia said.

"What was not clear was whether it is going to buy bonds of the countries that are in the firing line like Spain and Italy," she added. "It was not clear at all."

Miguel Angel Rodriguez, associate analyst at Spanish online brokerage XTB, said the central bank appeared to have started its intervention by purchasing Portuguese and Irish government bonds.

Trichet had failed to give the impression that the eurozone was united in confronting the crisis, he said.

European Commission President Jose Manuel Barroso seemed to stir up the market concern by sending an open letter to eurozone leaders saying debt contagion had spread.

"It is clear that we are no longer managing a crisis just in the euro-area periphery," he wrote.

A July 21 deal on a second bailout for Greece has failed to prevent sharply higher debt-risk premiums for Italy and Spain, the eurozone's third and fourth-largest economies.

The agreement included a new, 160-billion-euro ($226 billion) package of financial aid for Greece. But almost one-third was funded by private sector investors, sparking a selloff of other doubtful sovereigns.

The combined effect of the statements from Frankfurt and Brussels rocked the markets.

The risk premium investors demand to buy Spanish 10-year bonds over safe-bet German debt struck a euro-era record of 407 basis points Wednesday. It eased to 364 points early Thursday but shot back to 399 after Trichet spoke.

The Ibex-35 index of most-traded Spanish shares closed down 3.89 percent at 8,686.50 points, the first time it has fallen below the psychological barrier of 9,000 points since June 2010.

Banking stocks were especially hard-hit with Santander down 4.43 percent at 6.389 euros and BBVA down 4.12 percent at 6.469 euros.

Spain's Treasury later announced it would not hold a bond auction previously scheduled for August 18.

But a finance ministry official said it would be wrong to describe the decision as a cancellation because no sale had been organised, explaining that in previous years, too, Spain had not held a bond auction in August.

The eurozone debt crisis has already claimed Greece, Ireland and Portugal, forcing them to seek bailouts from the European Union and International Monetary Fund.

There are growing fears that Italy and Spain, the eurozone's third- and fourth-biggest economies, could be next in line, developments that would dwarf previous bailouts and could undermine the euro itself.

Madrid argues it has pursued tough reforms including raising the retirement age, relaxing collective bargaining rules, making it easier to hire and fire employees, cutting civil servant wages, forcing banks to bolster their balance sheets and placing assets such as the national lottery on the block for sale.

© 2011 AFP

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