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Spanish banking troubles keep markets on edge

Published:Wednesday | May 30, 2012 | 12:00 AM

Concerns that Spain's ailing banking sector might worsen the European debt crisis weighed on markets Tuesday, though Asian indexes eked out gains on hopes that China will take new measures to boost its economy.

Spain's banks are sitting on massive amounts of soured investments in the country's imploded real-estate market.

That has led to the recent nationalisation of Bankia, the country's fourth-largest lender, which revealed last week it needed more money than expected - €19 billion (US$23.8 billion) - in state aid to shore itself up.

Investors fear that the Spanish government, which is already under pressure to lower its debts at a time of recession and record-high unemployment, will be overwhelmed by the cost of saving the country's banking sector.

That has magnified worries of a possible debt implosion in Europe's weaker economies - starting with Greece, whose future in the euro currency union could hinge on the results of a June 17 election.

If Greeks vote for parties that support the country's bailout terms, ensuring a continued flow of rescue loans, the country will hope to stay in the Eurozone.

The pro-bailout parties hold a narrow lead, according to the latest polls, but uncertainty over the ultimate outcome of the elections will keep market sentiment fragile and prone to swings in mood.

"It would appear that the problems in Spain are now becoming more of a worry than the opinion polls in Greece," said Michael Hewson, markets analyst at CMC Markets.

In Europe, Britain's FTSE 100 was down 0.2 per cent to 5,347 while Germany's DAX rose 0.3 per cent to 6,343. The CAC-40 in Paris was flat at 3,042.

The euro was also kept in check, trading flat at US$1.2535.

Spain's Ibex underperformed the rest of the region, falling 1.6 per cent, with shares in Bankia dropping another 11.4 per cent.

The yield on the benchmark 10-year government bonds - a key gauge of investor confidence in the country's ability to avoid bankruptcy - edged up to 6.47 per cent from 6.43 per cent on the open.

The rate is perilously close to the seven per cent rate considered too expensive for a country to pay in the long term.

The latest bad news to hit Spain was a report showing retail sales were down 9.8 per cent in April in year-on-year terms, more than double the 3.8 per cent fall posted in March.

Impact of austerity cuts

The figures underlined the brutal impact that government austerity cuts and economic uncertainty are having on households. They also bolster the case for Europe to find new ways to bolster economic growth, though the continent's leaders disagree over how to achieve that.

Years of financial and economic uncertainty - first in the global credit crunch and now in the debt crisis - have hammered public confidence in the future of European integration, according to a survey by Pew Research across eight European Union countries, including five that use the euro.

"This crisis of confidence is evident in the economy, in the future, in the benefits of European economic integration, in EU membership, in the euro and in the free market system," Pew said in a statement accompanying its survey.

Despite those headwinds, Pew found there was no desire for those countries that use the euro to abandon the single currency and return to their former currencies, such as the French franc or the Spanish peseta.

- AP