European Stocks Erase Gain in Final Hour; Banks Retreat

European Stocks Surge on Spanish Bailout; Santander, BBVA Rally
Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s two biggest lenders, jumped in Madrid. Photographer: Angel Navarrete/Bloomberg

European stocks erased gains in the final hour of trading, led by a selloff in Spanish and Italian lenders, as optimism faded that Spain’s 100 billion euro ($125 billion) bank bailout will contain the sovereign debt crisis.

Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA erased gains after Fitch Ratings Services downgraded Spain’s two biggest lenders. UniCredit SpA and Intesa Sanpaolo SpA both tumbled more than 5 percent as bond yields rose. Volkswagen AG paced advancing shares.

The Stoxx 600 was little changed at 241.92 at the close of trading after rallying as much as 1.9 percent earlier. The gauge climbed 2.9 percent last week after China cut interest rates and the European Central Bank said it’s ready to add more stimulus if the economy worsens.

“We are not prepared to add risk at this stage,” said Bill O’Neill, chief investment officer for Europe, the Middle East and Africa at Merrill Lynch Wealth Management, on Bloomberg Television. “Getting the deal right in Spain is the key litmus test of success with turning the euro crisis around.”

The Stoxx 600 initially rallied after Spain asked euro-area governments for funds to bail out its banks, making it the fourth member of the currency bloc to seek a rescue since the debt crisis began almost three years ago.

Spanish Bailout

The Spanish state’s bank-rescue fund, known as FROB, will receive the money and extend it to lenders. The sum is equivalent to about 10 percent of Spain’s gross domestic product. FROB debt counts as public debt, which amounted to 69 percent of GDP last year.

National benchmark indexes fell in 12 out of 18 western European markets. Germany’s DAX climbed 0.2 percent, the U.K.’s FTSE 100 slipped 0.1 percent and France’s CAC 40 slid 0.3 percent. Italy’s FTSE MIB dropped 2.8 percent, the biggest decline since May 23.

In Madrid, Santander slid 0.3 percent to 4.84 euros and BBVA was unchanged at 5.15 euros after Fitch downgraded the banks’ long-term issue default ratings to BBB+ from A with a negative outlook.

The banks earlier rallied as much as 9.7 percent and 10 percent respectively on Spain’s bank bailout request. The amount is about 2.7 times the funds deemed necessary by the International Monetary Fund in a report released on June 8.

Banco Popular Espanol SA, which has seen its share price cut in half this year, fell 1.9 percent to 1.69 euros.

Italian Banks

Italian lenders declined as the country’s 10-year bonds reversed an earlier advance with investors betting the country is now at the frontline of Europe’s financial woes. UniCredit SpA dropped 8.8 percent to 2.48 euros, Mediobanca SpA slid 5.6 percent to 3.05 euros and Intesa Sanpaolo SpA dropped 5.9 percent to 1.03 euros.

“As we expect a further escalation of the crisis, we believe Italy will probably need outside help at some point,” Citigroup Inc. wrote in a report to clients today. Italy’s fiscal position “is probably on an unsustainable long-term path,” according to the note.

Volkswagen AG increased 1.3 percent to 123.45 euros and Porsche SE rose 2.4 percent to 41.41 euros after VW was said to have cleared an important hurdle toward buying the 50.1 percent of the Porsche sports-car business that it doesn’t already own.

German authorities determined the deal may not face taxes, according to people familiar with the matter. Still, some issues have yet to be resolved, and the timing of the transaction is uncertain, the people said.

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