European stock markets fall sharply ahead of vital EU summit

Monday, 25 June 2012 04:31

By Ben Salisbury

Spain has formally requested a bailout loan for its banking sector from its European Union (EU) partners.

Its eurozone partners have agreed to lend Spanish banks €100 billion.

However, both Spanish and Italian shares have fallen sharply as the markets express their fears that an EU summit on the 28th and 29th of June will once again fail to agree a plan to halt the euro debt crisis.

Both the main share indexes in Italy and Spain fell by more than four per cent after a call from the Spanish Prime Minister, Mariano Rajoy, for this week’s to “dispel doubts” about the future of the euro.

Mr Rajoy said: "We must dispel doubts over the eurozone. The single currency is, must be, irreversible."

The fall in share values was also influenced by a report from Reuters that credit ratings agency Moody’s was planning to downgrade some Spanish banks.

Other European stock markets also fell today. Germany’s Dax slipped by 1.9 per cent and the French Cac index was down by 2.2 per cent.

Meanwhile, billionaire investor, George Soros stoked up tensions ahead of the summit by saying that the single currency may cease to exist if European leaders do not make vital decisions at this week’s summit.

Mr Soros suggested that the EU create a fund to buy Spanish and Italian bonds and for a European Fiscal Authority to be created. The bond purchases would be conditional on austerity measures being introduced and they would be financed by issuing European debt backed by all EU members.

The markets are also likely to be affected by a delay in dealing with the audit of Greece. This will be delayed because both the Greek Prime Minister and its incoming finance minister have been ill.

This means that no decision on Greece will be made at this week’s EU summit.

German Chancellor, Angela Merkel also reiterated Germany’s opposition to a mooted plan to pool eurozone debts. She said “there has to be a balance between guarantees and controls.”

Meanwhile, in another indication of the conflicts between European nations on the best way forward, Angela Merkel reiterated her opposition to calls to pool eurozone debt.

How to recapitalise European banks will be discussed at the summit. Amongst the discussions will be a plan for a single European banking supervisor, a common scheme for guaranteeing bank deposits and whether to introduce a central fund to wind down bad banks.

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