GLOBAL MARKETS took a pounding yesterday as Spain’s seizure of a regional savings bank fanned anxiety about the euro zone debt crisis, sending the single currency lower and piling pressure on AIB and Bank of Ireland.
With European stocks tumbling to their lowest level for eight months, steep declines in the value of the big two Irish banks threatened to undermine their capital-raising efforts. AIB shares lost more than 19 per cent at one point, closing 12.79 per cent weaker at 90.7 cent. Bank of Ireland, down more than 12 per cent during the day, closed 8.9 per cent weaker at 66.5 cent.
As the EU authorities struggle to regain investor confidence after setting up a €750 billion rescue net for weak euro members, concern that the sovereign debt crisis could infect banks weighed heavily on shares and fuelled demand for German debt.
“The big challenge is to prevent the vicious circle, that means for example the crisis of the public sector turning into a banking crisis,” said European Central Bank governing council member Ewald Nowotny.
With bank borrowing costs rising, the turmoil came as Italy followed other euro states with a €24 billion austerity plan and Berlin mulled over extending a ban on speculative share dealing to all German shares.
Herman Van Rompuy, president of the European Council, insisted the European authorities had done “reasonably well” in the crisis triggered by the Greek debacle. “We stumbled, but we did not fall,” he said in Brussels. “We are not in the monetary Armageddon. Verbal inflation will not bring back confidence. It is a political duty to keep a sense of proportion.”
In New York, however, JP Morgan Chase chief Jamie Dimon said European leaders faced the prospect of costly bank bailouts if countries such as Greece do not make good on their debts.
“A lot of that sovereign debt is owned by European banks, so when these countries have problems, so will their banks.”
With escalating tension between North and South Korea a further worry, regulators in Spain merged four savings banks just days after the authorities took control of the Catholic Church-owned Cajasur.