Struggling Spain pushed European stocks and the euro sharply lower yesterday as investors were spooked by the country’s deteriorating outlook, largely discounting a Spanish bank rescue accord.
At the close, Madrid was down 5.82 per cent while Milan plunged 4.39 per cent as the eurozone contagion effect took its toll on the banks.
The yield, the rate of return earned by investors holding the benchmark Spanish 10-year bond was at 7.2680 per cent, up from 6.969 per cent Thursday, with the Italian 10-year bond at 6.1600 per cent. The safehaven German bond was at just 1.164 per cent.
Any rate above six per cent for long-term borrowing is widely considered to be unsustainable for more than a short period, while seven per cent is the level at which Greece, Ireland and Portugal were forced to seek debt bailouts.
In London, the benchmark FTSE 100 index of top companies closed down 1.09 per cent at 5,651.77 points. In Frankfurt, the DAX 30 lost 1.90 per cent at 6,630.02 points and in Paris the CAC 40 slumped 2.14 per cent to 3,193.89 points.
In foreign exchange deals, the European single currency fell sharply to $1.2173 from $1.2276 in New York late Thursday.
Dealers said the bank bailout was largely as expected but the markets were hit after Madrid warned that it did not expect the economy to return to growth until 2014 and regional finances came under increased strain.
The economy will shrink 1.5 per cent this year, better than the previous estimate of 1.7 per cent, but then contract another 0.5 per cent in 2013 instead of growing 0.2 per cent, the Spanish budget minister said.
The forecasts hit sentiment badly and the damage was compounded by news that the Valencia region was asking the central government for financial aid, heaping the pressure on Madrid, which has imposed sweeping austerity measures in a hugely unpopular drive to stabilise the public finances.
Spanish stocks plunged more than five per cent while Madrid’s long-term borrowing costs soared into the seven per cent danger zone on fears the government will have to find more money to save the regions from going broke.
Mass protests against the government’s draconian austerity measures overnight added to the negative tone towards Spain and Italy.
“Spain is once again grabbing the headlines,” said RIA Capital Markets analyst Nick Stamenkovic, citing mounting concern about the state of regional government finances.
“Ten-year Spanish yields (are) heading to an all-time high as investors fret Spain will need a sovereign bailout soon... the euro is under pressure amid the grim economic outlook,” Mr Stamenkovic said.
On Wall Street, stocks were lower, with the blue-chip Dow Jones Industrial Average down 0.63 per cent at around 1545 GMT while the tech-rich Nasdaq fell 0.74 per cent.
“Spanish concerns are ramping up to exacerbate sentiment, with yields on the troubled nation’s benchmark 10-year bonds jumping well above the key level of seven per cent,” Charles Schwab & Co. analysts said.