Euro is weakened by Spanish bank action

THE EURO came under renewed attack yesterday as concerns over Europe’s fiscal problems intensified after Spain’s central bank took control of a savings bank.

The Libor interest rate banks charge each other for three-month loans in dollars has climbed to the highest since July as the European Central bank (ECB) announced it bought €10 billion worth of Euro zone government bonds.

The seizure of the Spanish bank and a higher Libor rate “enhance fears about the European banking system and the impact that could have in the US banking system and the economy worldwide”, said Bruce McCain, chief investment strategist at Key Private Bank

CajaSur, a 146-year-old lender owned by the Catholic Church, was taken over by the Bank of Spain in the latest move by the central bank to restructure the country’s troubled mutually owned banks or “cajas”. Four Spanish savings banks plan to form the nation’s fifth-largest financial group with more than €135 billion in assets as regulators push weak lenders to merge with stronger partners. Caja de Ahorros del Mediterraneo, Grupo Cajastur, Caja de Ahorros de Santander y Cantabria and Caja de Ahorros y Monte de Piedad de Extremadura submitted a proposal to Spain’s central bank to pool their businesses.

By midday in New York, the euro had fallen 1.6 per cent to $1.2370 versus the dollar. It hit a four-year low against the US currency last week of $1.2142.

The purchases, announced yesterday, bring the ECB’s bond-buying to about €26.5 billion since it began the programme two weeks ago, in support of a €750 billion “shock and awe” rescue package adopted by euro zone governments and the International Monetary Fund to try to arrest a gathering sovereign debt crisis.

Market participants say nervous international investors are likely to sell at any sign of uncertainty or doubts over the euro zone economy and bond markets, suggesting the ECB will have to intervene regularly in coming weeks.

Michael Hart at Citigroup said: “The euro zone sovereign crisis, a worldwide regulatory crackdown, fears of an economic slowdown in emerging markets and the possibility of a ‘double-dip’ provide the makings of a perfect storm.”

However, investors drew solace from a jump in sales of previously owned US homes in April to a five-month high as buyers rushed to close contracts before the expiry of a tax credit. This sparked a small rebound in European equities in the afternoon session.

The pan-European FTSEurofirst 300 index of top shares closed up 0.3 per cent at 973.21 points, snapping three straight sessions of losses which caused an 8 per cent drop in the index.

The Iseq closed pretty much flat at 2,886.14.

In a note published yesterday, Ulster Bank Capital Markets senior economist Simon Barry said the CajaSur bailout served as a reminder of the ongoing strains in key areas of the financial sector. The euro fell as much as 1.8 per cent to $1.2346 before trading at $1.2374.

Sterling lost ground as currency traders gave a muted reception to news that George Osborne, the new UK chancellor, planned to cut public spending by £6.25 billion.

Analysts said the pound had failed to gain traction on fears the spending cuts could undermine UK growth. – (Additional reporting Copyright The Financial Times Limited 2010/ Bloomberg)