Nerves Calmed -- For Now Markets Jump on Relief over Spanish Bank Bailout
Financial markets jumped on Monday after the weekend agreement to bail out Spain's banking sector. Policymakers said the capital injection of up to 100 billion euros would spare Spain a full bailout and calm market turbulence. But the relief may be short-lived. Europe will face fresh turmoil if the Greeks ditch austerity in their June 17 election.
Global financial markets leapt on Monday as relief spread after the EU agreed over the weekend to provide the Spanish government with aid to shore up the country's struggling banks.
The euro was on course for its biggest daily rally against the dollar in almost eight months after rising nearly one percent to $1.26694, its highest level since May 23, before retreating to trade at $1.2639.
Germany's blue-chip stock index, the DAX, jumped 2.4 percent at the opening on Monday, with financial stocks among the biggest winners. Deutsche Bank rose as much as 5.2 percent. Earlier, Asian stock markets had rebounded with Japan's Nikkei index and the Hong Kong Hang Seng index both up two percent. Meanwhile, Spain's Ibex leapt 5.3 percent.
Over the weekend, the 17-nation currency union agreed to lend Madrid up to 100 billion ($125 billion) for its bank rescue fund, more than an initial audit suggested it might need, after the Spanish government swallowed its pride and applied for assistance.
No precise amount was set because Spain said it needed time for an independent assessment of the capital needs of its banking sector, which is due to be delivered in less than two weeks.
The move follows the bailouts given to Greece, Ireland and Portugal since 2010 and will raise the total sum that the European Union and the International Monetary Fund have devoted to European rescues in the debt crisis to 500 billion.
Markets had been falling in recent weeks on fears that the capital shortage in the Spanish banking sector could widen into a full-blown public debt crisis for Spain, which would have forced the euro zone's fourth-largest economy into an even bigger bind that would have stretched the EU's firefighting funds to the limit.
Relief May Be Temporary
However, the news may only bring temporary relief, because investors are bracing themselves for the Greek election on June 17 that could plunge Europe deeper into turmoil if voters opt for the left-wing Syriza party, which wants to cancel austerity measures imposed in return for international aid.
Policymakers said the Spanish bailout would contain the crisis. EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters on Sunday: "I am confident this will send a strong signal to the markets that the euro area is ready to support Spain in its efforts to restructure and recapitalize its banking sector. We are ready to support Spain ... which is critical for calming down market turbulence in Europe and (ensure) the proper functioning of the financial system in Spain."
Rehn said the level of public debt in Spain was under control and that Madrid was taking "very determined action" to sustain its public finances.
The Spanish government at the weekend avoided calling the aid agreement a "rescue" because financial bailouts in the past implied humiliating conditions and surveillance by European officials.
However, German Finance Minister Wolfgang Schäuble said on Sunday that European officials would scrutinize Spain's efforts to restructure its banking sector, which got into trouble over bad real estate loans. He added that Spanish banks were not a threat to the stability of the euro.
"We have to make clear that there's no danger of contagion (from) the banks," Schäuble said in an interview with public broadcaster ARD. "It must be clear to everyone that the Spanish banks, despite all their problems, are not a danger for the stability of the euro and they will be getting enough capital."
However, Nobel Prize-winning economist Joseph Stiglitz criticized the bank bailout. "The system ... is the Spanish government bails out Spanish banks, and Spanish banks bail out the Spanish government," Stiglitz said on Friday. "It's voodoo economics. It is not going to work and it's not working."
cro -- with wire reports