Zapatero rejects bailout rumours

Spanish prime minister Jose Luis Rodriguez Zapatero today dismissed as "complete madness" rumours that Spain would need a Greek…

Spanish prime minister Jose Luis Rodriguez Zapatero today dismissed as "complete madness" rumours that Spain would need a Greek-style bailout and vowed to fight against such speculation.

There had been murmurings among European markets today that the country would soon ask for €280 billion in aid from the euro zone.

The rumours helped send  European shares to a two-month closing low today and are being seen as a sign of increasing fears that the Greek bailout will be enough to contain the financial crisis facing the euro zone.

"These rumours can increase the interest-rate differential compared with German bonds and damage our national interests," Mr Zapatero told a news conference in Brussels today. "This is simply intolerable and I can tell you that we will certainly combat it."

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A €110 billion EU-IMF bailout for Greece has so far offered little relief to calm concern about a possible contagion. Investors were uncertain about Athens' ability to push through ambitious budget cuts, promised in exchange for aid, as unions stage strikes and shut down tax offices, government ministries, schools and hospitals.

Adding to the concern, German economy minister Rainer Bruederle said the international bailout package agreed for Greece is not intended to cover the country's entire financial requirements for the next three years.

The FTSEurofirst 300 index of leading European shares closed 3 per cent lower at 1,033.18 points, its lowest closing level since early March, and crossed into negative territory for the year, down 1.2 per cent.

The index, which rose nearly 26 per cent in 2009, has come under pressure in the last two months as investors fretted over the fiscal health of euro zone states.

Banks were among the biggest fallers, with Barclays, HSBC, Societe Generale, BNP Paribas and Deutsche Bank down 1.9 to 6.1 per cent.

Spanish lenders Banco Santander and BBVA tumbled 7.1 and 7.6 per cent respectively, while Greek bank stocks fell 10.3 per cent.

The euro tumbled to a one-year low below $1.31 and the risk premium on Greek, Portuguese and Spanish bonds soared

Across Europe, the FTSE 100 index was down 2.6 per cent, Germany's DAX slipped 2.6 per cent and France's CAC 40 fell 3.6 per cent.

Spain's IBEX, Portugal's PSI 20 and Greece's stock market tumbled 4.2 to 6.7 per cent.