Relief over Spain bank rescue fades quickly

Associated Press Modified: June 11, 2012 at 5:15 pm •  Published: June 11, 2012
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NEW YORK (AP) — A burst of enthusiasm over a rescue of Spanish banks melted away Monday within hours, and investor anxiety about the troubled finances of Europe grew on both sides of the Atlantic.

On Wall Street, stocks opened sharply higher but sank all day. Selling only accelerated in the last hour of trading, and the Dow Jones industrial average closed down 142 points.

More alarming, bond investors signaled that they are less confident about lending money to the governments of both Spain and Italy, which investors fear will be next to seek help.

The rescue, announced Saturday, figured to soothe financial markets. Instead, it inflamed them.

Investors are already worried about weaker U.S. job growth and an economic slowdown in Asia. And the next flashpoint in the Europe crisis is just days away — an election in Greece on Sunday that could speed that country's exit from the euro.

Jim Herrick, director of equity trading at Baird & Co., said investors realized "that this Band-Aid approach with Spain will not solve larger problems in Europe and that this could be a long, arduous process."

As investors considered the long-term fate of Europe, Herrick said, "it was time to sell."

European countries committed to funnel up to $125 billion to Spain to distribute to its banks, which have been driven almost to insolvency from a bust in real estate prices four years ago.

Spain became the fourth European nation to seek a rescue, after Greece, Portugal and Ireland.

Particularly over the past six weeks, financial markets have worried that the debt problems in Europe will explode into a world financial crisis and hurt the fragile global economy.

Those strategists had predicted a rally in stocks after the deal was announced. But the relief was short-lived.

Investors appeared uncertain about whether the rescue would be enough to save Spanish banks and whether the terms of the loan, still undisclosed, would deliver another blow to the recession-hobbled Spanish economy.

France's main stock index closed down 0.3 percent, and Germany's rose just 0.2 percent. Both indexes were up more than 2 percent earlier in the day. Spain's benchmark stock index shot higher by 6 percent but closed down 0.5 percent.

In the United States, the broader market drifted lower all day. The Standard & Poor's 500 index ended down 16.73 points at 1,308.93, and the Nasdaq composite index closed down 48.69 points at 2,809.73.

The Dow finished down 142.97, one of its biggest daily declines this year, at 12,411.23. It opened up almost 100 points.

"People want to see clarity," said Stephen Carl, head of equity trading at The Williams Capital Group, an investment bank in New York. "No one likes a situation that's to be determined."

The yield on Spanish 10-year bonds climbed 0.29 percentage point to 6.47 percent, an indication that bond investors are demanding a higher return to lend money to the Spanish government. The yield had fallen earlier.

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