The rise and fall of Spain

12th June 2012

The yield on Spanish 10-year bonds rose to 6.47 percent at the close of trading after falling to 6 percent in the morning. And the benchmark IBEX-35 stock index closed down 0.5 percent after surging 6 percent in early trading.

Analysts said the retreat shows there were still worries about the government's finances despite the bailout.

"This is a realization that Spain, while providing money for its banks, is going to add to its debt-to-GDP ratio," said Paul Zemsky, head of asset allocation at ING Investment Management.

"They're borrowing more money, not doing anything about growth," he added.

"Today we're not worried about Spain's banking system falling off a cliff, but other than that, nothing's changed."

The Guardian's Nils Pratley says the market's scepticism is understandable. "The good news from the bailout is actually modest: Spanish banks, after an injection of capital, will be better equipped to absorb the tide of property-related losses that are heading their way."

"But the bad news is very significant: the Spanish government will have to stand behind the bailout and the addition of up to €100bn to the national debt will make the overall mountain Pyrenean in size if recession follows for another couple of years. On some estimates, Spain's debt-to-GDP ratio could approach 100%."

Will Italy be the next domino to fall?

Meanwhile, concerns grew Monday that Italy could be the next victim of Europe's financial contagion, forcing fearful investors to sell Italian stocks and bonds.

According to the New York Times, the main fear is that Italy's economy cannot grow its way out of a recession fast enough to pay for its colossal national debt. Other concerns include the fact that Italy, like Germany and France, will have to shoulder a large portion of the bailout bill even as it wrestles with its own severe economic downturn.

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