Rally Fizzles After Relief About Bailout Yields to Fears

Market enthusiasm over the Spanish bank bailout did not last even a day.

After strong Asian trading seemed to roll on to Europe on Monday morning and then to the United States, by afternoon most European indexes were flat and Wall Street closed the session decidedly down.

The weekend agreement for Europe to provide Spain with up to 100 billion euros to reinforce its shaky banks seemed to confirm for investors that the euro zone’s fiscal and financial problems were so entrenched that they eluded a single fix to a single member of the monetary union.

The rally evaporated faster than market gains posted after other major developments in the crisis over the last two years, like the creation of a euro zone rescue fund and both bailouts for Greece. It did not take investors long to start questioning Spain’s overall economic health, how far its real estate values could still fall, and the structure of the bailout itself. Analysts are also looking at who’s next, setting sights on Italy.

And the specter of a Greek exit from the euro zone, depending on how elections turn out next weekend, could loom over trading throughout the week.

“There are chronic problems and there are acute problems,” said Kenneth Wattret, chief euro zone economist in London for BNP Paribas. The deal reached for Spain last weekend “has dealt with one of the acute problems.”

The chronic issues, including fiscal imbalances and deteriorating economies in the euro zone, remain to be addressed, he said, although he pointed to a growing sense of urgency among European Union officials as at least one reason for optimism.

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