European debt crisis: Spain downgrade threat unsettles markets

Dragged down by banking stocks, Spain’s Ibex index lost over 130 points to 9526.5, a fall of 1.36%, while Italy’s FTSE MIB dipped 1.5%. Germany’s Dax and France’s CAC both fell 1.1% Financial markets face more turmoil after Moody’s put Spain’s Aa2 credit rating on review for possible downgrade while US debt talks are still deadlocked. The news sent the euro falling and stock markets in London and the eurozone down. The euro fell 0.5% to $1.4265. Dragged down by banking stocks, Spain’s Ibex index lost over 130 points to 9526.5, a fall of 1.36%, while Italy’s FTSE MIB dipped 1.5%. Germany’s Dax and France’s CAC both fell 1.1%. In London, the FTSE 100 index opened more than 50 points lower at 5819, fall of 0.9%. The US debt crisis is escalating: US lawmakers postponed a crucial vote on a budget deficit plan last night, heightening concerns over a likely debt default. After chaotic scenes in the House of Representatives , the Republicans who control the House called it a night and scheduled an emergency meeting for Friday morning. “I am no longer sure if this is reality or I am watching a Hollywood summer blockbuster,” said Gary Jenkins, head of fixed income research at Evolution Securities. “With no resolution with regard to the US debt ceiling and with continuing contagion in the European government debt market it is clearly time for the safe haven trade.” He joked: “I will be away for a few days watching the markets from a safe distance and no doubt by the time I return Captain America will have sorted the debt ceiling and the EU will be making plans for ‘Mamma Mia 2 – back to Greece’.” The dollar came under pressure on Friday morning, dropping to a four-month low against the yen. “This is a very serious situation. As long as the wrangling over the US debt ceiling continues, the dollar/yen will be vulnerable to further falls,” Osamu Takashima, chief forex strategist at Citibank in Tokyo told Reuters. In Europe, concern is growing that Spain, the eurozone’s fourth-largest economy, hamstrung by meagre growth and high unemployment, will fail to put its finances in order and need a Greek-style bailout. Nervousness among international investors has sent Spanish government bond yields to their highest level in over a decade. Having fallen below 6% a week ago on relief about the Greek bailout, the yield on 10-year bonds rose again this week to hit 6.158% on Friday morning. Italian yields climbed to 5.934%. Moody’s said last week’s Greek package set a precedent for private sector participation in future debt restructurings in the eurozone. The credit rating agency added that a downgrade is likely to be limited to one notch. It explained: “Firstly, the continued funding pressures facing the Spanish government, which the precedent set for future euro area support arrangements by the official package for Greece is likely to exacerbate, and the resulting increase in risks to bondholders. “Secondly, the challenges posed to the government’s fiscal consolidation efforts by the weak growth environment and the continued fiscal slippage among several regional governments.” The Spanish government has set a deficit target of 1.3% of GDP for the country’s 17 regions for this year and next, but some of their new governors say this will be impossible due to their predecessors’ fiscal mismanagement. Moody’s Aa2 rating for Spain is in line with S&P’s AA setting, while Fitch has the country one notch higher at AA+. All have negative outlooks. European debt crisis Europe US economy United States Spain Market turmoil Stock markets Ratings agencies Julia Kollewe guardian.co.uk

Posted by on July 29, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.