Spain's debt woes send shares, euro lower

Wed May 30, 2012 8:53am EDT
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By Richard Hubbard

LONDON (Reuters) - European shares fell and the euro neared a two-year low on Wednesday, depressed by worries that Spain's banking problems would push its borrowing costs to unsustainable levels and force it to seek a bailout.

U.S. stock index futures also pointed to a weaker session on Wall Street .N, after a slip in Asian shares amid signals that China did not plan a large stimulus package.

Spain's central bank governor, who is stepping down early in a storm over banking woes that have pushed borrowing costs near the unsustainable 7 percent level, said the government would miss its deficit target this year.

"The Spanish banking crisis has the potential to knock the stuffing out of the euro zone irrespective of the Greek election results," said Jane Foley, senior currency strategist at Rabobank. The Greek vote on June 17 has raised concern the country could reject its bailout deal and leave the euro zone.

The single currency was down around half a percent to $1.2433, its lowest since early July 2010. It also lost more than 1 percent against the safe-haven yen, taking it to a four-month low of 98.274 yen.

The euro's plight underpinned the dollar index .DXY, measured against a basket of major currencies, which rose above 82.73 to its highest since September 2010, dragging down dollar-sensitive commodities.

The pressure on the single currency and other European asset markets gained a brief respite when the European Commission, the executive arm of the European Union, said the euro area should move towards direct recapitalization of banks using its permanent bailout fund.

It also called for the region to move towards a full banking union and consider issuing euro bonds - all measures that could ease the crises in peripheral European nations but would face strong opposition from some member states, including Germany.   Continued...

A man passes a screen showing the activity of the FTSE index at Canary Wharf financial district in London August 5, 2011. REUTERS/Luke MacGregor