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Monday, Jun 11, 2012 2:15 PM UTC

Market relief rally on Spain rescue fades

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Market relief rally on Spain rescue fadesPeople walk by an electronic stock board of a securities firm in Tokyo, Monday, June 11, 2012 as Japan's Nikkei 225 index jumped 165.64 points and closed at 8,624.90. Asian stocks and the euro climbed Monday after Spain sought a lifeline for its ailing banks, easing fears that Europe's debt crisis was about to spin out of control. (AP Photo/Koji Sasahara)(Credit: AP)

BRUSSELS (AP) — A global market rally over a European bailout of Spanish banks faded on Monday, as investors worried the country might have trouble paying the money back.

Finance ministers from the 17 countries that use the euro said they were willing to lend Spain up to €100 billion ($125 billion) after Madrid said it would need help to shore up banks felled by bad real estate loans. Spain has not said exactly how much of that it will tap, but markets were initially cheered by the fact that it was finally owning up to needing help.

Early gains were largely lost, however, as analysts warned the deal would not spell the end of Europe’s debt crisis. Some worry that the Spanish government, which is responsible for paying the money back, will struggle with the extra debt.

The government will try to get the money back from the banks, but if it cannot do so, it will have to borrow on international markets, where its borrowing rates are high.

After an initial 5 percent surge, Madrid’s Ibex stock index was up a mere 0.6 percent. France’s CAC-40 rose 0.7 percent to 3,070.54 and the DAX in Germany gained 1 percent to 6,194.17. The FTSE index of leading British shares was up 0.3 percent to 5,450.40.

The euro, which had surged over the weekend on news of the Spanish aid deal, fell back down, trading 0.7 percent lower at $1.2555 on Monday.

Wall Street edged higher on the open, with the Dow industrial average and the S&P 500 both gaining 0.2 percent, to 12,582.01 and 1,328.14 respectively.

Asian stocks closed higher earlier in the day following better-than-expected data on the weekend that showed China’s exports jumped in May from a year earlier.

Japan’s Nikkei 225 index climbed 2 percent to close at 8,624.90. South Korea’s Kospi added 1.7 percent to 1,867.04 and Hong Kong’s Hang Seng added 2.4 percent to 18,953.63. Benchmarks in Singapore, Taiwan, mainland China, Indonesia and New Zealand also rose.

Michael Hewson, an analyst at CMC Markets, said the early market reaction had been a “relief pop” that was bound to be short-lived.

“The decision by Spanish PM Rajoy to acquiesce to the inevitable and request help for Spain’s ailing banking sector at the weekend is the first sign of an acknowledgment of the problems facing the Spanish economy, but the fact it took so long in the face of so much denial remains a problem with respect to the credibility of the Spanish administration,” Hewson said.

With Spain taken care of for the moment, investors will now turn their attention to the thornier issue of Greece, where voters head to the polls this coming weekend in an election likely to determine whether the debt-mired country will stick with the common currency. If Greece leaves the euro, that will raise questions of whether other countries might, too.

The Spanish rescue plan also doesn’t address other critical issues.

Take Italy, for example: government debt in the third-largest euro economy continues to pile up as its economic growth stagnates. Some fear it is only a matter of time before Italy becomes the next country to ask for rescue money.

“I think it’s only a brief respite for the markets,” said Tom Kaan of Louis Capital Markets in Hong Kong. “The €100 billion bailout is hopefully setting up a firewall against a much worse deterioration. Here we are, saving the banks. But what is next?”

Spain is the fourth euro nation to seek a rescue, after Greece, Portugal and Ireland. A financial crisis has gripped Spain since 2008, when a real estate bust caused big losses for many banks.

The rise in equities also drove oil higher. Benchmark oil for July delivery was down 5 cents $84.05 per barrel in electronic trading on the New York Mercantile Exchange.

___

Pamela Sampson contributed to this report from Bangkok.

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