Markets take fright on Spain as Valencia asks for bailout
Broad sell-off triggered across European exchanges despite eurozone finance ministers signing off on €100bn aid package
MADRID'S stock exchange suffered its worst day in two years yesterday, dragging down the broad European equity market after the Valencia region asked for a bailout, rekindling concerns about Spain's financial health and the eurozone debt crisis.
Even as eurozone finance ministers unanimously approved a loan package of up to €100bn for Spain to repair its banks, the country's rising bond yields suggested that doubts about the country's financial status were continuing to grow.
Spanish 10-year sovereign bond yields surged to historic highs, moving further above the 7pc line that markets view as too expensive to be sustainable.
The FTSEurofirst 300 closed down 1.5pc at 1,048.98. Spain's IBEX fell 5.8pc to six-week lows in its biggest one-day percentage drop since May 2010. Italy's FTSE MIB dropped 4.4pc.
The approval by the eurozone's 17 finance ministers was granted on a conference call yesterday morning and was considered a formality after they reached a political agreement with Spain earlier this month.
The decision came as Madrid revised its growth forecast for 2013 downward, with the government saying it now expected the economy to contract by 0.5pc next year instead of growing 0.2pc, with unemployment remaining at around 24pc.
Spain had hoped the bank overhaul would reassure financial markets that it can contain the crisis and avoid a larger bailout.
Under the terms of the deal, a first payment of up to €30bn is expected to arrive in Spanish coffers before the end of the month so that the country can begin recapitalising a financial system that has been devastated by a property bubble collapse and a grinding recession.
"Spain will be expected to maintain its commitments to correct its excessive deficit in a sustainable manner by 2014 and to adopt the structural reforms set out," European Union Economic and Monetary Affairs Commissioner Olli Rehn said in a separate statement.
He said the bank aid was for solvent banks unable to find private financing, so that they can restructure and not require future public assistance.
A NAMA-style bad bank will be created to buy "problematic assets of aided banks", the memorandum said.
The bad bank, set to be operational by November, will buy mainly real-estate development loans and foreclosed assets, as well as "other assets, if and when there are signs of strong deterioration".
Like NAMA, it will pay "real long-term economic value" for the assets, according to the document posted on the Spanish Economy Ministry website.
"The involvement of the private sector in burden sharing would be restricted to shareholders and junior bondhonders," Simon O'Connor, a spokesman for Mr Rehn's office, said. "That's made very clear in the memorandum."
Still, the document does open the door to the liquidation of banks, even as the Spanish officials said there were no plans to do so.
Spain will have to present "an orderly resolution plan" for banks that aren't viable, which will protect deposits, minimise the burden to the taxpayer and involve the transfer of assets to the bad bank, the document said.
The bank rescue is a key plank in Spain's efforts to maintain access to financial markets and rein in debt-crisis contagion.
Prime Minister Mariano Rajoy began mapping out Spain's economic path through the next 18 months yesterday in the face of mounting pressure from protesters and investors.
Spain's bailout will start through the EFSF, which has €240bn in remaining capacity. The permanent €500bn European Stability Mechanism (ESM) is on hold until a German court ruling due in September.
It won't be allowed to work directly with Spanish banks until the euro area establishes a common bank supervisor with an expanded role for the ECB.
The ESM will take over the rescue programme once it is up and running.
When the transfer takes place, the loans won't gain any kind of seniority status, the European ministers said in their statement. (Additional reporting Reuters)