Stocks jump in Europe and US on hopes of rescue for Spanish banks

On a day that Moody's downgraded the safety rating of six German banks over the eurozone debt crisis, major stock indexes that have been roiled by the crisis rose 2 percent on the Spanish rescue hopes.

|
Bebeto Matthews/AP
Getco Securities traders Philip Finale (l.) and its floor official Peter Giacchi (r.) work on the floor of the New York Stock Exchange on June 6.

Concerns for the health of European banks took center stage for global financial markets Wednesday, as hopes rose that eurozone nations would agree on a support package for the ailing Spanish banking system.  

Major stock indexes in Europe and the US jumped more than 2 percent.

The financial markets, however, have been roiled in recent weeks by concerns over the fate of Europe's currency union – with more downward pressure than uplift for share prices. It remains to be seen how Spain's crisis will be resolved, and a volatile Greek election is less than two weeks away.

Nations including Greece and Spain face a combination of high unemployment and debt-induced austerity. The risk of a messy breakup of the eurozone, with one or more nations exiting, has weighed on stock prices even in the US and other nations outside Europe.

On Wednesday, the positive expectations of a bailout for Spain were accompanied by new reminders of the risks if things don't go well. Six German banks saw their safety ratings downgraded by a prominent credit-rating firm – a sign that Europe's debt crisis affects even the largest economies.

Moody's Investors Service announced the credit rating cuts on Wednesday, while also downgrading the German subsidiary of the Italian bank UniCredit.

In economic and fiscal terms, Germany is viewed as Europe's strongest major nation. But the credit scores of German banks are merely in the middle to lower tier, compared with other European banks. That's a sign of how these banks have loan portfolios that stretch beyond German borders, and of how eurozone economies are intertwined in their economic fortunes.

"Today's rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis," Moody's said in a statement.

The downgraded banks include Commerzbank, Germany's second largest. (Moody's hasn't finished its current review of the nation's largest bank, Deutsche Bank.)  

Moody's said the loan quality of the banks carries "downside risks" from the debt crisis and a potentially weaker global economy. Meanwhile, Moody's said the banks have a "comparatively small" amount of equity capital, the cushion available to absorb losses. That capital "could diminish in a stress scenario," the firm said in its statement.

On June 17, Greek voters will elect a new Parliament, in elections that could potentially set the nation on course for falling out of the eurozone and defaulting on its debt.

Whatever the outcome of the elections, eurozone members appear set to face crucial tests of their resolve in the weeks and months ahead.  

Some economists believe the currency union, with its disparate cultures and nations of differing fiscal health, is bound for eventual breakup, whether or not Greece becomes the first to go. Others argue the benefits of the common currency region provide a powerful incentive for the nations to hold together.  

Market pressure is on for eurozone members to put sufficient support mechanisms in place to keep financial distress from spreading to more debt-laden nations such as Italy or even France.  

Economists at the International Monetary Fund recently described a scenario Europe must try to avoid: "a bad equilibrium of rising [interest rates], a funding squeeze for domestic banks, and a worsening economy."

Such a negative outcome in the 17-nation eurozone would have implications far beyond Europe, potentially dragging the US economy near or into recession.

But as Wednesday's market upswing showed, investors also see the possibility of more upbeat outcomes in Europe.

European efforts to prepare a Spanish rescue come alongside other signs of policy engagement. Eurozone leaders are considering possible steps such as issuing collective "eurobonds," in a sign of determination to hold the currency union together.  

Investors on Wednesday were also digesting headlines about possible new monetary easing from major central banks. Until recently, the US Federal Reserve has shown reluctance to make new stimulus efforts. But a weak monthly jobs report in the US, coupled with the global risk posed by an expected recession in Europe, may be opening the door to more "quantitative easing" of monetary policy.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Stocks jump in Europe and US on hopes of rescue for Spanish banks
Read this article in
https://www.csmonitor.com/Business/2012/0606/Stocks-jump-in-Europe-and-US-on-hopes-of-rescue-for-Spanish-banks
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe