World markets cautious on Spain banking woes

MOSCOW - European markets remained in a fragile mood Monday with the euro dropping to near 11-month lows on concerns about Spain's ailing banking ailing sector following the announcement of bailout plans for troubled lender Bankia.

Spain's main stock index closed at an almost nine-year low and interest rates on the government's 10-year bonds rose on concerns about the government's ability to resolve the country's banking industry.

Nationalized lender Bankia, Spain's fourth largest lender, announced late Friday that it needed (euro) 19 billion ($23.8 billion) in state aid to shore itself up against its bad loans - a far bigger bailout than expected.

Spain's Prime Minister, Mariano Rajoy, said Monday that the government had no choice but to bail out Bankia, which has been crippled by Spain's real estate crisis.

"We took the bull by the horns because the alternative was collapse," said Rajoy, stressing that Bankia clients' savings were now safer than ever.

Spain's main IBEX 35 stock index closed down 2.17 percent to hit an almost nine-year low of 6,401.20. Fears over Spain's ability to finance the bailout sent yields for Spain's 10-year bonds on the secondary markets up to 6.45 percent - a high for the year to date and close to the key 7 percent rate beyond which long-term financing on the bond markets is considered unaffordable.

Other European stock indexes also mostly fell. France's CAC-40 closed 0.2 percent lower at 3,042.97 and Germany's DAX dropped 0.3 percent to 6,323.19 after modest gains in the morning. Britain's FTSE 100 rose 0.1 per cent to 5,356.34.

In currencies, the euro dropped from $1.2578 on Friday to near 11-month lows of $1.2531 on Monday. The dollar fell to 79.45 yen from 79.66 yen.

Despite the gloom surrounding Spain, investors found some cheer on weekend opinion polls that strengthened hopes of Greece sticking with the euro and the austerity measures of its bailout plan.

The likelihood of Greece leaving the eurozone has been growing steadily since early May, when political parties opposed to the harsh terms of the country's financial rescue received unexpectedly high support in polls.

The Greek exit would extend financial turmoil in the country and spread financial difficulties to other nations using the euro.