Bulls Retreat on Spain Bailout Plan

Investors gave a thumbs down to Spain’s planned bank bailout, setting off a global market rout that puts the country and the euro zone in a dire position.

Spain agreed over the weekend to accept as much as €100 billion ($125 billion) in European aid to recapitalize its banks, a plan designed to ease concern that Spain itself could be dragged down by the declining fortunes of its banks.

Instead, confidence in Spain deteriorated among the constituency the country most needs to impress: the buyers of its government bonds. After a short-lived burst of strength Monday morning, Spanish bond yields reversed course and began a sharp rise. The 10-year bond was yielding 6.521%, three-tenths of a percentage point higher than at Friday’s close. Bond yields rise when their prices fall; a higher yield indicates an increased perception of risk.

Credit-default swaps on the Spanish government, insurance-like contracts that pay off if Spain defaults, zoomed Monday into record territory.

The hourglass…has been turned over, but each time…there seems to be less and less sand in it.

Similar U-turns were seen across financial markets. Spain’s benchmark stock index jumped as much as 5.9% before ending down 0.5%. Other European stock markets started the day strong but steadily lost ground. Italian stocks dropped 2.8%.

In the U.S., the Dow Jones Industrial Average rose almost 100 points before tumbling to close down 142.97 at 12411.23. U.S. bank stocks were among the biggest drags on the market.

Investors’ disillusion with the Spanish bank plan reflects worries about the strength of Spain itself—and the risks for those lending to it. Meantime, many investors already are looking ahead to this weekend, when Greek elections could become a prelude to Greece’s exit from the euro zone.

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