Eurozone crisis: political worries in Spain and Italy send markets tumbling

Investors alarmed by corruption scandal around Spanish PM Mariano Rajoy and polls showing gain by Silvio Berlusconi

Growing political uncertainty in Spain and Italy sent stock markets tumbling on Monday as investors became increasingly concerned that a new round of instability could undermine efforts to end the eurozone crisis.

Spanish prime minister Mariano Rajoy was forced to deny involvement in a corruption scandal which has led to calls for his resignation, while in Italy new polls showed Silvio Berlusconi gaining ground before elections this month. Investors fear the former Italian prime minister's promise to repeal an unpopular property tax could increase his support, leading to a hung parliament and a move away from the reforms implemented by the regime run by technocrat Mario Monti.

The recent global market rally came to a sudden halt, with a sell-off across the board. In London the FTSE 100 finished down 100.40 points at 6246.84, its biggest one-day points fall since July 2012, with £25bn wiped off the value of Britain's top companies.

Spain's Ibex ended 3.77% lower at 7919.6, while Italy's FTSE MIB fell 4.5% to 16,539. Germany's Dax dropped 2.49% to 7638.23, and France's Cac closed 3% lower at 3659.91.

In the US, the Dow Jones Industrial Average also came under pressure, losing 140 points, almost 1%, in early trading.

In the bond markets, Spanish yields rose 23 basis points and Italian ones climbed 15 basis points as investors reduced their exposure to both countries. But at 5.45% and 4.48% respectively, the yields were still well below the 7% widely seen as the danger level.

The euro lost over 0.5% against the dollar, falling to $1.3554. The single currency fell nearly 1% against the pound to 85.9p after hitting a 15-month high last week.

Michael Hewson, senior market analyst at CMC Markets, said: "Investors are once again being spooked by political uncertainty from both Spain and Italy as both countries deal with local political difficulties that could derail ongoing and future reform programmes.

"While markets appear able to shrug off bad economic data, it is politics once again that has markets worried."

Joe Rundle, head of trading at ETX Capital, said: "Attention now shifts to the European Central Bank meeting on Thursday for more clues on how the region's central bank perceives the latest developments in Spain."

Spain's People's party (PP) said on Monday it would take unspecified legal action to draw the sting from the corruption scandal, which overshadowed a summit between Rajoy and German leader Angela Merkel to discuss Spain's struggling public finances.

To compound the misery of a country in its fifth year of crisis, Spanish jobless claims figures released on Monday rose to a record in a country where almost half of young people are on the dole. Protesters have been rallying since documents were published on Thursday which purported to show Rajoy and other senior PP officials received money that had been hidden from tax authorities for years .

"The things attributed to me are false. I have said that and reiterate it today," Rajoy said in Berlin, adding he was determined to continue to tackle a slump which began in 2008 when a property boom bust, and still threatens Spain with a European bailout. After Rajoy spoke, Merkel said: "We have a relation of full trust in the Spanish government."

As Rajoy set off for Berlin, his third-in-charge at the PP, Carlos Floriano, told a news conference in Madrid that the conservative party would sue "all those who may have attributed, leaked and published" documents allegedly drawn up by two former party treasurers and published in Spain's top-selling non-sports daily, El País.

The official figures showed a record 4.98 million Spaniards were registered as unemployed in January, a jump of 132,000 since December as many workers were laid off after the festive season.


Martin Roberts in Madrid and Nick Fletcher

The GuardianTramp

Related Content

Article image
Eurozone crisis: Spain refuses bailout terms
Mariano Rajoy puts Spain on collision course with ECB after ruling out any bailout terms despite bank president's insistence

Stephen Burgen in Barcelona

11, Sep, 2012 @2:42 PM

Article image
Eurozone crisis: Portugal sends stock markets tumbling
Threat of Portuguese government collapse causes FTSE to fall 74 points and German Dax and French CAC to drop 1.5%

Phillip Inman, economics correspondent

03, Jul, 2013 @6:31 PM

Article image
Italy votes against austerity leaving EU in turmoil

Fears that deadlock will lengthen Italy's two-year recession and spill over into rest of the eurozone hit markets across Europe

Ian Traynor in Brussels, John Hooper in Rome and Phillip Inman

27, Feb, 2013 @10:02 AM

Article image
Eurozone crisis: United States of Europe may be the only way to save euro
With France and Germany at odds, and events moving quickly, a strategy for fiscal and political union is being drawn up

Ian Traynor, Europe editor

04, Jun, 2012 @6:22 PM

Article image
G7 finance ministers back greater fiscal and financial union in eurozone
Finance ministers from top industrialised nations seek swift solution amid fears euro crisis will derail global economy

Nicholas Watt and Graeme Wearden

05, Jun, 2012 @6:42 PM

Article image
Signs of progress in Greece and Spain calm financial markets
Share prices rise, euro rallies and bond market pressure eases amid hopes of Greek coalition and Spanish bank bailout

Larry Elliott, economics editor

10, May, 2012 @7:21 PM

Article image
Euro talks stall over borrowing costs
Italy and Spain block endorsement of 'growth pact' unless measures are introduced to soften terms on financial assistance

Ian Traynor in Brussels

28, Jun, 2012 @11:37 PM

Article image
ECB's eurozone crisis remedy runs into German resistance
European Central Bank president Mario Draghi pushes bond-buying plan to cut borrowing costs for Spain and Italy

Ian Traynor in Frankfurt

02, Aug, 2012 @5:51 PM

Article image
Mariano Rajoy announces €65bn in austerity measures for Spain

Spanish prime minister makes spectacular U-turn to comply with EU bailout terms

Giles Tremlett

11, Jul, 2012 @12:45 PM

Article image
France, Germany and Italy urged to follow Spain’s lead to revive eurozone
Europe’s core countries must unlock growth potential in their economies with rigorous programme of reform, says OECD

Phillip Inman

06, Nov, 2014 @11:05 AM