While you were sleeping: Spanish aid might fall short

Tuesday 12th June 2012

The latest rescue in the euro zone has done little to stem concern that the region's debt crisis will be resolved soon.

While Spain's request for financial aid was met with European support to the tune of as much as 100 billion euros, a more generous package than anticipated, investors wonder what that will do to prevent another country falling victim to the crises that have now forced four of the 17 euro zone members to beg for outside assistance.

In late afternoon trading in New York, the Dow Jones Industrial Average fell 0.44 percent, the Standard & Poor's 500 Index shed 0.57 percent and the Nasdaq Composite Index dropped 0.69 percent.

In Europe, the Stoxx 600 Index ended the day little changed from the previous close. Earlier in the session it had gained as much as 1.9 percent, according to Bloomberg News.

"Given the gravity of the European problem, not just Spain, people are kind of waking up to the fact that this is something but not enough," James Dailey, portfolio manager of TEAM Financial Asset Management, told Reuters.

Greeks are heading to the polls this weekend to cast their votes after the previous elections in early May failed to produce a government as parties were at odds over the austerity measures that are part of the conditions for the nation's second EU/IMF bailout.

Spain's package is being seen in some circles as less restrictive than what has been demanded of average Greek citizens and could hinder efforts by pro-bailout parties in Greece to secure enough support to form a government.

Investors are concerned a new government might seek to exit the euro zone. Moody's has warned that a Grexit could lead to the demise of the euro altogether.

The European currency has fallen 4 percent in the past six months, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It was last 0.1 percent weaker at US$1.2499, after rising more than 1 percent earlier in the session.

"Given that we've decisively rejected any sustained price action above US$1.26 and have a lot of unanswered questions around the Spanish bank package and the Greek elections this weekend, the near-term prognosis for the euro is not good," Richard Franulovich, a senior currency strategist at Westpac Banking Corp in New York, told Bloomberg.

The European crisis still poses "a significant threat to financial stability", according to San Francisco Federal Reserve President John Williams.

"While the global financial system is stronger than it was three years ago, it remains vulnerable," Williams said in remarks prepared for delivery at a conference on Asian banking sponsored by his regional Fed bank.

"The European sovereign debt crisis threatens banks in that continent, and, by extension, elsewhere," he said. "Clearly, it represents a significant threat to financial stability."

Williams' comments are in keeping with increasing pressure from US officials, including President Barack Obama, on European leaders to once and for all resolve the crisis.

Bond yields are reflecting the concern. Spain's 10-year yield climbed 30 basis points to 6.52 percent, while Italy's 10-year bond yield jumped 27 basis points to 6.04 percent, according to Bloomberg.

BusinessDesk.co.nz

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