MADRID: World financial markets powered higher Monday after Spain performed a U-turn and grabbed a eurozone lifeline loan of up to 100 billion euros ($125 billion) for its crisis-torn banks.
The massive credit forced Spain’s Treasury to try to calm concern about the impact on the country’s mushrooming public debt while its 10-year borrowing costs remained high, despite some easing.
Prime Minister Mariano Rajoy and his conservative government faced rising criticism, too, after selling the aid deal as a victory and refusing to describe it as the state rescue that he had repeatedly ruled out.
Madrid led the global stocks rally, soaring 5.93 percent in opening trade with stricken lender Bankia, at the heart of the banking calamity, jumping more than 20 percent at one point.
London’s FTSE 100 index gained 1.80 percent, Frankfurt’s DAX 30 put on 2.04 percent and in Paris the CAC 40 rose 1.98 percent. Earlier, Tokyo advanced 1.96 percent and Hong Kong 2.44 percent.
The euro rose to $1.2631 from $1.2514 late Friday.
Investors still demanded high rates before buying Spanish government bonds.
Spanish 10-year government bonds yields eased from the previous close of 6.08 percent to a low of 6.017 percent — still above the six-percent level widely regarded as unsustainable over the longer term.
Keen to show no let-up in the government’s austerity drive and to banish concerns about the loan’s impact on Spain’s public debt, the Economy Ministry and Treasury issued a joint statement Monday to reassure investors.
“The Spanish government remains committed to the program of fiscal consolidation and structural reforms that has earned Spain the confidence of its European partners,” it said.
The Treasury vowed to carry on tapping the markets after raising 56.8 percent of the total 86 billion euros it plans this year through regular auctions of medium- and long-term bonds.
Borrowing 100 billion euros in one go — at a rate of three percent according to a report in El Pais — would raise Spain’s public debt level by about 10 percentage points of gross domestic product.
“This financial assistance will not only not undermine the present conditions of the current stock of Spanish public debt; it will also reinforce its overall solvency,” the statement said.
A formal request for aid is expected by the next eurozone finance ministers meeting scheduled for June 21 in preparation for a full European Union summit on June 28-29, European Economic Affairs Commissioner Olli Rehn said Sunday.
The final figure will be known after the EU, European Central Bank and IMF finish a review of the situation and a formal accord will then be signed, he said.
Spain finally sought aid as its borrowing costs on the open markets soared and the price for fixing the banks’ balance sheets, heavily exposed to a property bubble that burst in 2008, spiralled.
Financial daily Cinco Dias said Spanish banking sources predicted Madrid would ask for about 60 billion euros, with an absolute maximum of 80 billion euros.
Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ, warned that the rescue may not banish investor concerns.
“It remains to be seen whether the loan effectively stabilizes/restores investor confidence in Spain with government debt set to rise by as much as around 10 percent of GDP ... leaving the government’s finances even more vulnerable to a further negative shock,” he said in a statement.
Greece’s June 17 elections could panic the markets if voters elect a government that rejects austerity conditions for the country’s bailout, potentially leading to its stormy exit from the eurozone.
“The unstable political situation in Greece which could potentially lead to Greece exiting the euro could prompt additional capital flight from Spain despite the recapitalization plan,” warned Hardman.
“Overall underlying economic fundamentals continue to remain broadly negative for the euro, supporting our lower forecast profile ahead.”
Eurozone policymakers announced after an emergency video conference on Saturday that they were “willing to respond favorably” to a Spanish plea for help.
Rajoy faced criticism Monday, however, after telling reporters Sunday the deal ensured “the credibility of the euro” and insisting that rather than buckling to pressure for the rescue, he had sought it all along.
The Spanish leader attended the Spain-Italy football game in Poland in the evening, assuring journalists that he was only going because the problem had been dealt with.
An editorial in El Pais said Rajoy had sought to argue that the eurozone had no choice but to open up its coffers to Spain to avoid the breakup of the single currency region.
“But there lies an abyss between that and saying that he was going to the Spain game in the Euro in Poland because ‘yesterday’s matter’ was ‘resolved.’”
