Global shares and the euro tumbled again on Monday as the euro zone’s debt crisis weighed heavily on financial markets and investors largely ignored a new European Union initiative to contain the crisis by enforcing strict fiscal discipline.
Markets became jittery over the Spanish government’s take-over at the weekend of regional savings bank Cajasur, which raised speculation that more unhealthy financial institutions may have to be bailed out to prevent a meltdown of the country’s banking system.
Market analysts said Cajasur was on the verge of bankruptcy after it lost more than 740 million euros invested in the country’s troubled real estate and construction business and there are several other banks facing a similar crisis.
The International Monetary Fund’s (IMF) appeal to the Spanish government on Monday to implement “far—reaching reforms” compounded fears that the economic woes of the heavily-indebted euro zone nation might be worsening.
There were also concerns that the troubles of Spain’s banking sector could hit the continent’s other banks, already reeling under the euro zone debt crisis.
Worries over the condition of Spain’s banking sector wiped out the slight recovery of the euro last Friday from a four-year low earlier in the week and the common currency of 16 EU nations dropped again by 1.50 per cent to 1.240 euros against the dollar at Monday’s close in European trading.
The new British government’s tough austerity measures announced by Chancellor of the Exchequer George Osborne in London to save up to 6.2 billion pounds (around 9.3 billion dollars) this year raised fears that the debt crisis may be spreading to EU countries outside the euro zone.
Osborne said the cuts in “wasteful spending” are needed to reduce the country’s budget deficit, which was 156 billion pounds in 2009-10.
In Frankfurt, the benchmark index DAX lost 1.5 per cent when it dropped to 5,733 in early trading, but recovered rapidly in the afternoon and reached the plus zone briefly on news that US home sales in April rose by 7.6 per cent to 5.77 million, much higher than expected by investors.
However, the DAX shed some of its gains in later trading and closed 0.4 per cent lower at 5,805.
In Madrid, the IBEX index closed 1.27 per cent lower and the Zurich SMI was down by 0.89 per cent, while the FTSE in London edged up by 0.13 per cent and the CAC 40 in Paris ended 0.01 per cent higher.
European banking shares were among the hardest hit in Monday’s trading.
The price of crude oil dropped by 1.05 per cent to $ 69.64 a barrel over worries that there will be less demand in Europe as several nations start implementing tough austerity measures to reduce their massive budget deficits and gold rose by 0.41 per cent to $ 1,192.45 an ounce.
On Friday, the finance ministers of the 27 EU member nations agreed to impose new political and economic sanctions on euro-zone member nations which build up their deficits and thereby endanger the stability of the single currency.
Greece’s budget deficit of around 13 per cent of the GDP and its staggering debts of more than 300 billion euros have triggered the debt crisis in that country, threatening other euro-zone nations with high deficits to be sucked into the spiral.
The finance ministers, who attended the first meeting of the EU’s economic taskforce in Brussels, decided to end EU funding and to suspend the voting rights of those nations which repeatedly violate the Growth and Stability Pact.
They also agreed on a coordinated effort to tackle similar crises in future and to strengthen competitiveness among the member nations.
Meanwhile, European Commission President Jose Manuel Barroso said the euro is a strong currency and it is not the cause of the present debt crisis in the euro-zone.
A high level of budget deficit among the euro-zone member nations is the real cause of the crisis, he said in a newspaper interview.
He hoped that the EU nations will emulate Germany’s example and keep strict limits on their budget deficit.
He welcomed the intention of the French government to get a debt limit incorporated in the country’s constitution like the “debt brake” in the German constitution.