Fears of sovereign bailout for Spain grow

Asian shares fell and the euro hovered near multi-year lows earlier on Monday as Spain ignited concerns about its ability to resist a sovereign bailout after two indebted regions looked for financial assistance from the central government.

Concerns that the Eurozone’s fourth largest economy will be forced to follow Greece, Portugal and Ireland drove 10-year US Treasury yields to a record low 1.4365% early in Asia.

Greece, Portugal and Ireland were bailed out by international lenders after the borrowing costs of all three countries rose above sustainable levels.

According to a report by the BBC on Friday Valencia asked the central government for a financial lifeline and on Sunday a local newspaper in Murcia quoted the head of its government as saying it would ask for funding help of up to EUR300m.

Today, the Bank of Spain reported that the country’s economy contracted by 0.4% in the three months prior to the end of June 2012.

Financial worries in Spain were said to have triggered selling in oil, which sent both Brent and US crude down by over USD1 at USD105.43 a barrel and USD90.34 a barrel respectively, while prices of corn and soybeans eased from record highs reported on Friday.

European stocks are expected to extend losses seen on Friday while US stock futures decreased by 0.5% which indicated a slow start in Wall Street, leading to financial spreadbetters calling for the main indexes in London, Paris and Frankfurt to open down by up to 1.5%.

MSCI’s broadcast index of Asia-Pacific shares outside of Japan fell by 2.2%, which would mark its biggest drop in one day in around two months.

Justin Harper of IG Markets said that “The fear now is that, given its debt woes, Spain may eventually need a bailout from the International Monetary Fund or the eurozone’s rescue fund,”

Bailout for Spain’s banks lifts Asian shares

Spain’s EUR100bn bailout package has lifted shares in Asia and resulted in a 1% gain for the euro against the US dollar and the Japanese yen.

Stock markets in Japan and Hong Kong were up by about 2% on Monday, with traders contributing the rise to the EUR100bn bailout for Spain’s banks, which was agreed on Saturday.

The bailout for Spain, which is targeted at its ailing banking sector suffering from bad loans to the country’s troubled property industry, carries fewer demands for austerity measures like those attached to the bailout of Greece.

Greece will hold a second elections on June 17, but last month the winners of the previous elections failed to form a government. Analysts agreed that the bailout for Spain will buy some time, but added that the crisis is far from over and the focus will shift again to Greece, which is expected to vote anti-austerity parties to power.

“All eyes are still on Greece’s upcoming elections but investors’ worries over the eurozone have eased in the short term,” Andy Du of Orient Futures Derivatives told the BBC.

International credit agencies have signaled the need to shore up Spain’s banks in the recent weeks and months, with Moody’s downgrading the ratings of 16 banks in May. The Spanish government also took control of banking major Bankia last month.

Depositors in Spain, like in Greece,have been pulling their funds from their bank accounts, but this weekend’s bailout is believed to have a calming affect and restore confidence.