Markets on alert after bank bailout

Sunday, May 23, 2010
By Paul Martin

Iain Dey and David Smith
May 23, 2010

FEARS of further turbulence in the financial markets mounted yesterday as Spain was forced to bail out one of its biggest regional banks, adding to worries about the eurozone.

Spain’s central bank took operational control of Cajasur, one of 44 large regional lenders that account for about half the Spanish banking market. It will need an immediate cash injection of €500m (£430m).

The intervention has heightened concerns that Spain’s regional lenders could put added strain on its public finances. The collapse of the Spanish property market has left the regional banks with an estimated €300 billion bad-debt problem. Concern about Spain’s banks is one of the worries that have been hanging over the eurozone in recent weeks.

Jean-Claude Trichet, head of the European Central Bank, added to eurozone woes when he warned Portugal that it must act immediately to cut its budget deficit.

Meanwhile, Britain’s economic growth is set to be revised higher this week, adding to recent evidence of recovery. The figures are unlikely to calm market nerves, however, after last week’s big sell-off triggered by problems in the eurozone.

Britain’s gross domestic product growth for the first quarter, initially estimated at only 0.2%, is set for an upward revision after news of a strong bounce for manufacturing in March. It follows figures last week showing a 6% rise in business investment in the first quarter and a £7.5 billion downward revision of Britain’s budget deficit for the 2009-10 fiscal year.

Two leading investment banks, JP Morgan and Goldman Sachs, predicted that Britain will grow 3% or more next year.

Improving economic news has taken a back seat in recent weeks as fears of defaults by Greece and other eurozone economies gave way to worries that austerity measures would hit growth in Europe and the global economy. “The market is increasingly moving away from fundamentals as risk aversion accelerates,” said Barclays Capital in a report.

Gerard Lyons at Standard Chartered accused the markets of overreacting. “They are running round like headless chickens,” he said.

Equity markets had been expected to open stronger tomorrow after a rebound on Wall Street late on Friday. The Dow Jones industrial average, after sliding below 10,000, ended with a 1.25% gain at 10,193.

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