June 12, 2012 in Business

Relief over Spain fades

Investors appear unsure about bailout
Pallavi Gogoi Associated Press

NEW YORK – 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 figured to soothe financial markets. Instead, it inflamed them.

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.”

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.

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.

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 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.”

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