Spain soothes debt worries...stocks, euro extend gains

Global markets managed to sustain last week's strength as the euro climbed after a reasonably successful Spanish bond auction eased some trepidation about the financial health of the southern European nations. Also boosting the confidence about the region's ability to tide over the sovereign debt crisis were tough new austerity measures announced by the likes of Spain and France. Worries about sovereign debt in Europe also retreated after European Council President Herman Van Rompuy said that stress tests on the region's banks will be published in July. That announcement helped assuage fears over European banks' loan books and their exposure to euro-zone sovereign debt as it came amid stiff opposition, particularly from regional banks in Germany. Earlier, the yield on ten-year Spanish government bonds rose amid speculation of a Greek-style bail-out for Spain and more worries about the financial health of the country’s banks. But those reports were dismissed by both the IMF as well as the Spanish government.

Markets mauled on Europe debt debacle

The Greek storm continued to rattle world markets. Fears that Greece may not be the only eurozone economy in need of bailout cash sent world equity markets into a tailspin. Apart from stocks, commodities and emerging market currencies bore the brunt of the worldwide meltdown. Risk appetite tumbled and investors rushed to the safety of the dollar and bonds. The euro fell to a 14-month low on the dollar and one-year low on the yen, raising concerns over the currency’s reserve status. However, Spain's successful auction of a 5-year bond helped nudge the euro off 14-month lows. Spain sold 2.23 billion euros of five-year notes with a bid-to-cover ratio of 2.35. The maximum yield was 3.58%. Average yield was 3.532%. The yield was 2.816% when Spain sold €4.5bn of the same securities on March 4. Investors are demanding the biggest premium in yield to buy Spanish bonds rather than benchmark German bunds since the euro’s introduction in 1999. Spain's budget deficit is almost four times the European Union’s limit.

Public protests mounted in Greece, stoking concerns whether it will be able to attain the proposed cuts in budget deficit to win €110bn in aid from EU and IMF. Other members of ‘PIIGS’ like Spain and Portugal were staring at further downgrades. The idea of EU as a unified, cohesive economic bloc and euro as its common currency took further beating. To make the matters worse, China’s benchmark stock index slid to its lowest level in eight months as investors fret about government measures to cool the property market and a flood of new bank shares coming to market. Global mining shares were also hit by Australia's decision to slap resource tax on companies like BHP Billiton and Rio Tinto.

Pound sterling declined amid a strong possibility that the UK will see its first hung parliament since 1974. Investors are worried that Britain's budget deficit will remain high. Still, strategists at Lloyds TSB Corporate Markets said that sterling's weakness could have more to do with general risk aversion than worries about a hung parliament. The gap of about 8% in support between conservative David Cameron and Labour Party leader Gordon Brown in the latest polls is little changed from April 6, the day the premier called the election. Voting was to end at 10 p.m. on Thursday. Exit polls will give the first indications of the outcome but the final result won’t be known before Friday afternoon.

Eurozone throws its weight behind Greece...finally

In a bid to restore confidence in their common currency, all 16 eurozone leaders have reportedly agreed to provide joint financial assistance to the debt-laden Greece in tandem with the International Monetary Fund (IMF). The euro rose on Friday from a 10-month low against the dollar after European Central Bank (ECB) president Jean-Claude Trichet toned down his opposition to the IMF's involvement in a Greek rescue plan. "Europe has taken a big step in the face of a big challenge," Greek Prime Minister George Papandreou told reporters after talks in Brussels, declaring himself satisfied. European Council President Herman Van Rompuy called the deal significant not just for Greece, but for the stability of the eurozone.

Backers of the plan included French President Nicolas Sarkozy, according to reports. Sarkozy previously had opposed a role for the Washington-based IMF. The deal was brokered during a summit in Brussels. The French President said that the eurozone would put up two-thirds of the money, and the IMF the rest. Terms imposed by German Chancellor Angela Merkel mean that the concerted EU-IMF mechanism could be activated only under strict conditions and would require the unanimous approval of the eurozone. Greek Finance Minister George Papaconstantinou said that the deal removed the risk of default by his country. He also said that no aid was being given to Greece as of now.

EU leaders were under pressure to come up with a detailed plan to aid Greece, amid mounting worries that the debt troubles in countries like Greece, Portugal and Spain could spread elsewhere in the euro zone. Eroding confidence in the euro was also among the factors that influenced the outcome of the Brussels summit. The euro fell to a 10-month low against the dollar in afternoon trading on March 25 after the Trichet reportedly said that getting help from the IMF to solve the region's debt problems would be very, very bad. Separately, Zhu Min, the deputy governor of the People's Bank of China, said that the Greek debt crisis was only the tip of the iceberg and complained that Europe had offered no decisive action on the matter.

Earlier, the ECB took some pressure off Greece by extending emergency lending rules, saying that its bonds won’t be cut off from ECB refinancing operations next year in case Moody’s lowers its rating to a level comparable with other companies. That decision marked a reversal for the ECB, which said in January that it wouldn’t soften its collateral policy for the sake of a single country. The bank was scheduled to reintroduce pre-crisis rules at the end of 2010.

Eurozone's economic recovery stalls in Q4

Eurozone GDP growth in the fourth quarter of was 0.1% over the previous three months, short of the 0.3% figure economists were expecting. In the third quarter, GDP had risen by 0.4%. Fiscal issues of Greece and a struggling German economy were among the key factors dragging on growth. The recession in Greece deepened, with GDP falling 0.8% in the fourth quarter after a 0.5% slump in the previous three months, European Union’s (EU) statistics office in Luxembourg said on Friday. The German economy stagnated in the fourth quarter after recording 0.7% growth in the previous three months, while Italian GDP fell 0.2%. France’s economic expansion accelerated to 0.6% from 0.2%. From a year earlier, euro-area GDP declined a seasonally adjusted 2.1% in the fourth quarter. For the full year, the economy contracted 4%. Separate data showed that industrial production in the region fell 1.7% in December, the most in 10 months.

As market turmoil pushes bond yields higher across southern Europe, the recovery is in danger of losing momentum. European policymakers are struggling to come up with a plan that allays concerns about the credit worthiness of the euro zone’s peripheral economies. The euro has fallen 7% in the last two months on concern that Greece’s fiscal problems will spread to other countries. Earlier this week, EU leaders ordered Greece to get its deficit under control and pledged determined and coordinated action to protect the region from any possible fallout from Greece’s debt crisis, but stopped short of setting out concrete steps.

European debt troubles pummel global equities

Stocks across the world sank amid growing concerns of a potential sovereign debt default in Europe, even as global markets were recovering from the recent turbulence owing to concerns on China and new bank regulations in the US. Portuguese bonds come under renewed pressure as fears of Greece’s debt problems spreading in the other parts of the eurozone persisted. Banking stocks from Portugal, Spain, Greece and Ireland slid further as worries about sovereign debt and its potential impact on the eurozone continued to spread. European Central Bank (ECB) President Jean-Claude Trichet said that the eurozone still faces major challenges but is heading in the right direction. He was speaking shortly after the ECB kept interest rates steady. Eurozone governments have borrowed a record €110bn from the markets so far this year, forcing up borrowing costs for those countries with the weakest public finances as they pay a heavy price for their ballooning debt levels.

Meanwhile, China’s government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans. In addition, a senior policy adviser to China's central bank said that asset bubbles were a concern for the nations' policy makers, reflecting official unease about the rapid gains in real estate prices. Overseer of US$700bn government bank bailout program said that Fed policies could be creating US housing bubble similar to one that triggered the 2008 global financial crisis.

Risk premium escalated further amid mounting worries that last year's astonishing recovery could lose steam, particularly in the matured economies, notwithstanding the ultra-loose monetary policies and the unprecedented fiscal stimulus. Gains in the US dollar accelerated as investors and fund managers fled risky assets and sought refuge in the relative safety of the greenback. The US dollar rose to an eight-month high against the euro. The dollar gained amid discouraging signals in several European countries as well as a mixed US jobs report for January.

The cost to protect against a default on European sovereign debt exceeded that of US investment-grade companies for the first time. Bond prices rose, pushing the yields down, amid heightened fears about the fiscal stability of Greece, Spain and Portugal. The dollar’s climb reduced the appeal of commodities as an alternative investment. Crude oil tumbled to a seven-week low as the dollar surged on speculation that European efforts to reduce deficits will curb growth in that region. Crude oil futures posted their worst loss in six months on Feb. 4.

Asian currencies dropped for a fourth week, the longest run of losses since June, as concern that some European nations will struggle to contain and finance budget deficits eroded demand for emerging-market assets. The MSCI Asia-Pacific Index of regional shares slumped to a 10-week low. Emerging-market equity funds lost US$1.6bn in the week ended Feb. 3, the biggest outflow in 24 weeks, according to US-based research company EPFR Global.

The Dow Jones Industrial Average fell below 10,000 level for the first time since Nov. 6. The blue chip US benchmark recovered on the last trading day, albeit marginally, to end above the key level. All the three major US indexes touched three-month lows before recovering on Friday. A three-session rout had sent the US market to its lowest point since last fall. European stocks suffered the biggest weekly slump in 11 months. The Dow Jones Stoxx 600 Index retreated extended the measure’s fourth straight weekly decline to 3.9%.