Spanish bank rescue fans concerns

08:46, May 25, 2010      

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The European debt crisis cast fresh shadows on markets Monday as a Spanish government bailout of a local bank stoked investors' fragile confidence despite efforts by some EU nations to push forward their austerity measures to cut public deficits.

The FTSE 100 index of leading British stocks was down 16.85 points, or 0.3 percent, at 5,046.08, while France's CAC-40 fell 16.86 points to 3,413.88 and Germany's DAX was 68.65 points lower at 5,760.60.

"Again, Europe is the driving force behind the lower market, with a failed Spanish bank reigniting concerns and reminding investors that problems remain," said Andre Bakhos, director of market analytics at Lek Securities in New York. "Until clarity and resolution are achieved the volatility factor will remain high."

The Bank of Spain over the weekend replaced managers of regional savings bank CajaSur with representatives from its Fund for Orderly Bank Reconstruction after the Cordoba-based bank refused to merge with Unicaja, a larger, profitable savings bank based in Malaga. CajaSur and Unicaja had been in merger talks since July.

CajaSur, which accounts for 0.6 percent of the assets of the Spanish banking industry, lost 596 million euros ($737 million) last year and 114 million euros ($141 million) in the first quarter of 2010.

The rescue of CajaSur could cost up to 2.7 billion euros ($3.3 billion), a newspaper reported Monday, adding to the burden on Spain's already strained public finances.

Spain's Finance Minister Elena Salgado said the government did not have an estimate for how much the rescue of CajaSur will ultimately cost, saying only that CajaSur would be sold at auction "in a relatively short time" in a "competitive process" to ensure that the rescue operation "has the lowest possible cost to taxpayers."

"Our financial system is absolutely solvent. You can't say it is at risk because of an institution as small as CajaSur. But obviously it was important to send a signal of strength, of control, of solvency," she told Cadena Ser radio.

The rescue of CajaSur comes as the government is introducing a fresh round of austerity measures that include a freeze on state pensions and an average cut this year to civil servants' salaries, aiming at bringing the public deficit down to a eurozone limit from 11.2 percent of its GDP last year.

Unions representing public sector workers have called a strike for June 8, while a general strike is also likely over the tough new austerity measures.

Also Monday, Britain unveiled details of some 6.25 billion pounds ($8.9 billion) in cuts to "wasteful" spending in line with its campaign pledge.

"We inherited a terrible economic situation and we are going to put it right," said Chancellor of the Exchequer George Osborne, who will present an emergency budget on June 22 to address the dire state of public finances.

Meanwhile, Germany is reportedly to cut its budget by 10 billion euros ($13 billion) a year until 2016 in order to set an example for the eurozone and to comply with the budget deficit rules in the constitution.

Source: Global Times


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