Spain’s IBEX 35 Erases 5.9% Gain on Concern Over Rescue

Spanish stocks fell, with the IBEX 35 Index erasing earlier gains of as much as 5.9 percent, on concern a 100 billion-euro ($126 billion) bank bailout will increase the nation’s debt burden.

Bank stocks also reversed a rally amid speculation some firms will need to raise capital. Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, the nation’s two biggest, ended little changed, as did CaixaBank. Banco Popular SA dropped 1.9 percent and Bankinter SA gained 0.5 percent. All five advanced at least 9.5 percent in earlier trading.

The IBEX 35 lost 0.5 percent to 6,516.4 at the 5:30 p.m. close in Madrid. The benchmark gauge has retreated 24 percent so far this year. The Madrid Stock Exchange Banks Index fell 0.1 percent, its first loss in eight sessions, trimming an earlier advance of 7.7 percent.

“There are lots of questions and they haven’t interrupted the vicious circle between banks and sovereign,” said Fabio Di Giansante, a fund manager at Pioneer Investments in Dublin, which oversees $246 billion worldwide. “It’s a bit mixed, but it’s clearly a step in the right direction.”

Spanish Economy Minister Luis de Guindos on June 9 requested the emergency loans from the euro area to shore up a banking system that has more than 180 billion euros of bad assets. The bailout loan will be channeled through Spain’s bank-rescue fund, known as FROB, and extended to lenders that need it.

Santander fell 0.3 percent to 4.84 euros. BBVA closed unchanged at 5.15 euros. CaixaBank added 0.3 percent to 2.36 euros. Banco Popular lost 1.9 percent to 1.69 euros. Bankinter gained 0.5 percent to 2.50 euros, after increasing 15 percent.

A Separate Fund

The amount on offer is about 2.7 times the funds deemed the minimum necessary for Spanish banks by the International Monetary Fund in a report released June 8 and five times the money requested by the Bankia group, the country’s third-biggest lender, to cleanse its balance sheet.

“The size of the bailout was much bigger than expected by the markets and that is certainly a positive in that it will enable Spanish banks to absorb greater losses,” said Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment in London. “However, it does come with a tail in that this capital injection has to go through Spain’s national accounts, which means effectively the Spanish government is on the hook for the bailout.”

Sovereign Yields

Spanish bonds fell, reversing earlier gains. Yields on 10-year notes rose 29 basis points to 6.51 percent.

The statement on the aid didn’t make clear whether financing will come from the European Stability Mechanism, the region’s permanent support fund, which will probably start operating in July, or the temporary European Financial Stability Facility. If the cash were to come from the ESM, its treaty provides it with preferred creditor status, junior only to the IMF.

Stress tests and audits under way will lead to new provisions and capital requests for weaker banks, analysts at JPMorgan Chase & Co. wrote in a report.

“While we welcome the announcement, there are many vital missing items such as the final amount or conditions of the loan,” JPMorgan analysts including Jaime Becerril in London wrote. “Either way, we see high risk of dilution for banks’ equity holders as further provisions will follow and the relationship between banks and the sovereign just became closer.”

Investors now await the results of an independent audit that, together with a report from the International Monetary Fund, will help determine which lenders will require the funds and how much they’ll need.

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