Investor Sentiment Sours Over Spain Bailout

Investor sentiment over the Spanish bank bailout has soured, just hours after European and Asian stock markets were buoyed by a massive 100bn euro debt deal.

In early trading, London's FTSE 100 index had jumped 1.80%, Frankfurt's DAX 30 hit 2.04% and in Paris the CAC 40 rose 1.98%.

But by the close gains had been reduced to 0.05% for the FTSE, 0.17% on the DAX and 0.29% in Paris.

Spanish 10-year bond yields had also initially dropped below the psychologically important 6%, making it easier for Spain's government to borrow, but later rose to 6.44% as the euphoria subsided.

Madrid's IBEX 35 benchmark index initially soared 5.77% higher shortly after the open, with Spanish bank shares leaping 6% on their first day of trade following the aid deal to recapitalise the country's weaker lenders.

In the US, the Dow Jones closed down 1.13%.

Encouraged by the bailout, oil prices had also topped $102 a barrel for a time.

The initial positive mood was sparked after Spain asked finance ministers from the 17 eurozone countries to rescue its banks , which have been crushed by bad land and property loans.

They responded by offering up to 100bn euro (£81bn) in credit that the Spanish government could funnel to banks.

European Commission spokesman Amadeu Altafaj said it would be "reasonable" to charge a modest rate of interest on rescue loans for the banks.

"It is premature to talk about interest rates, you cannot talk about a definite rate since it will depend on market conditions but, yes, percentages of 3% or 4% are reasonable for these operations," he said.

In Asia, the Hang Seng had earlier climbed up 2.4%, the Nikkei 1.9% higher and the Shanghai Composite some 1.1% as the trading day closed.

But China quickly warned that more significant structural changes are still required to safeguard longer term stability.

"In the interests of mid or long-term stability, we hope the eurozone will improve consensus and take more decisive action," China's vice finance minister Zhu Guangyao said.

The rescue for Spain's banks follows bailouts for Greece , Ireland and Portugal since 2010.

Angela Merkel's government was forced to defend the EU rescue for Spain, with many Germans convinced their generosity is being abused and sceptics warning that promising aid without tough conditions sets a risky precedent.

Aides to the German Chancellor justified the huge bailout on the grounds that the Spanish economy was not in such dire shape that it required the kind of terms imposed on Greece, and the aid would not be paid directly to Spanish banks.

"The Spanish application comes from the state, the money will go to the state, the state is liable and the state takes on the responsibility for the stipulated conditions," Mrs Merkel's spokesman Steffen Seibert said.

Spain is the eurozone's fourth-biggest economy - twice the size combined of those countries which have been bailed out so far - and therefore critical to the wider eurozone health.

Sky News economic editor Ed Conway said: "What we've seen earlier with the bailouts is a rise in the markets as they react positively at first.

"The problem is that after a little while the markets start looking for question marks and they have then fallen back as time has gone by."

Wider issues of eurozone health also remain, with confirmation of Italy being in deep recession with a 0.8% quarterly rate contraction - the worst in three years.

Meanwhile, Portuguese banks' borrowing from the European Central Bank rose 6% in May from the previous month to hit a new record, and consumer sentiment has plunged in Ireland, according to a new poll.

The next key date for the struggling eurozone area comes on Sunday, when Greek voters head to the polls and the election is likely to determine whether the debt-mired country will stick with the euro.

A financial crisis has gripped Spain since 2008, when its property bubble bust and caused big losses for many banks.

A Spanish bank rescue fund set up in 2009 was running out of money, and the government has already nationalised Bankia, a major bank .