Recession in Spain Breeds Pessimism in Global Markets

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Spain flagBy CARLO PIOVANO, AP Business Writer

Concerns over Spain's financial condition weighed on markets Monday, after investors had initially bid up stocks on hopes that the Federal Reserve would provide more stimulus to the U.S. economy.

Official data on Monday confirmed Spain is back in its second recession in three years after shrinking by 0.3% in the first quarter, following a similar decline in the previous three-month period.

The contraction in Spain's economy is dimming hopes that the government will be able to cut its budget deficit as predicted and raises the specter that the country might be locked into a downward financial spiral. A recession makes it more difficult to lower the deficit, and as investors lose confidence in the country, borrowing rates rise, adding to the financial pressure.

Ratings agency Standard & Poor's on Friday downgraded Spain to just three notches above junk, following up the move on Monday by lowering its rating for 11 Spanish banks.

Investors are worried that Spain will not be able to support its banks, which are burdened with massive amounts of bad loans from an imploded property market. But rescuing Spain, the fourth-largest economy in the 17-country eurozone, might prove too expensive for the continent's bailout funds.

Amid the growing uncertainty, and as traders prepared for a holiday on Tuesday across much of continental Europe, stocks dropped.

After early gains, Britain's FTSE was down 0.5% at 5,748.50 and France's CAC-40 fell 0.9% to 3,236.59. Germany's DAX lost 0.1% to 6,793.98.

The cautious mood in Europe's stock markets was also evident in the performance of the euro, which fell to $1.3232 from $1.3259 late Friday in New York.

Wall Street likewise fell: The Dow Jones industrial average was down 37 points to 13,191 shortly before noon, while the Standard & Poor's 500 index fell seven points to 1,396 and the Nasdaq composite fell 18 points to 3,051.

Earlier, several Asian indexes had managed to close higher as investors there focused on the U.S. economy and hopes that the Fed might sanction another round of bond-buying, known as quantitative easing, after figures last Friday showed the world's largest economy grew less than expected in the first quarter.

The Fed has already carried out two rounds of bond-buying as it tried to drive down long-term interest rates and stimulate spending and business investment. Low bond yields also encourage investors to shift money to stocks.

New statistics released Monday showed a slowdown in U.S. consumer spending growth in March, confirming that the economic recovery remains patchy.

Trading in Asia was light given holidays in Japan and mainland China. All major Asian markets except Tokyo will be closed for holidays on Tuesday.

Hong Kong's Hang Seng rose 1.7% to 21,094.21, South Korea's Kospi added 0.3% to 1,981.99 and Australia's S&P/ASX 200 gained 0.8% to 4,396.60.


Looking ahead, traders are awaiting U.S. monthly jobs figures for April, to be released Friday, and the second round of France's presidential election on Sunday.

Polls suggest the election will be won by Socialist contender Francois Hollande, who wants to renegotiate a European treaty intended to limit excessive government spending to emphasize growth over austerity. Some investors fear Hollande could upset France's delicate cooperation with Germany, which has been critical to Europe's efforts to resolve its financial crisis.

Oil prices tracked equities lower, with benchmark oil for June delivery down 76 cents to $104.17 a barrel in electronic trading on the New York Mercantile Exchange.

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Pamela Sampson in Bangkok contributed to this report.

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32 Comments

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SPQR

Quit trying to sink the market !!!!

May 01 2012 at 9:27 AM Report abuse rate up rate down Reply
Koz

Get another solcialist country hit the dump. Don't hear much about Greece lately.
Remember you can't give everyone something for nothing, some one has to pay.

May 01 2012 at 9:12 AM Report abuse rate up rate down Reply
rtutbucks

I lived in Spain for 7 years, the main problem with Spain is that their entitlements are breaking their backs and now the government who has over promised and under delivered are dealing with hyper inflation and an inability to tax their citizens at higher rates which would further this disaster. They blew billions on the green energy crap which turned out to be one giant failure

May 01 2012 at 8:24 AM Report abuse +1 rate up rate down Reply
STEVE

One of the main reasons they are going back into recession is that they cut the spending too much .
If we cut the spending , like the republican Ryan Plan suggests, we would have a big recession too .

May 01 2012 at 1:41 AM Report abuse -2 rate up rate down Reply
1 reply to STEVE's comment
gkonig2

That was R Regan idea, but we know he would never be a candidate of today's GOP (unfortunately)

May 01 2012 at 9:38 AM Report abuse rate up rate down Reply
burnsengine

I swear.... there are so many people who have no business in WORLD-WIDE trading. Every little everything spooks the ***** out of them... and so, out of fear, they sell ... take their profits... and wait until they feel good again. The problem becomes, not fear, but courage.
Of course, in this world, few people have courage. Therefore, any little hiccup, screws the entire market in the short term and every financial analyst gets on tv and explains why we're all going to hell in a handbasket. So, based on that fear, the average person is fearful ... further screwing the markets.
I've always said that world-markets and a "world" economy is a joke and a disaster waiting to happen. I mean honestly, why should half the world pee their pants just because Spain is in a recession? What does Spain truly have to do with the stock price of Kellogs? or BP Oil? or China Telecom? Nothing really. Sure there are connections and purchases made between the countries - but it shouldn't have any bearing whatsoever on the health of a company.
This is just a "general" observation... and I don't think that Kellogs actually went down 5 points today based on an AOL News story - but I promise you this - several companies outside of Spain suffered today based on this crap. And that's what it is - crap.
I admit, I'm an amateur investor - but when you break it down, it's a simple thing. But the markets are way too volatile and fickle... because, honestly, investors are constantly looking and announcing every little problem around the world... just so they can make a quick buck tomorrow.

May 01 2012 at 12:54 AM Report abuse +1 rate up rate down Reply
1dallstar

yeah, aint socialism just grand

April 30 2012 at 11:01 PM Report abuse +3 rate up rate down Reply
1 reply to 1dallstar's comment
Setanta

and this WAS NEWS last year.

May 01 2012 at 12:10 AM Report abuse +1 rate up rate down Reply
wendylile

My daughter lived in Spain for three years. She was enthralled with all the "free stuff" she received, like medical care. We told her at the time that this type of spending couldn't last. Parents always know best!

April 30 2012 at 8:54 PM Report abuse +4 rate up rate down Reply
1 reply to wendylile's comment
gkonig2

somebody that still believes there is a free lunch! Healthcare is not "free" in Europe. They pay for it, jut not at the point of service. Same thing with France, Scandinavia and most of the world.

May 01 2012 at 9:41 AM Report abuse rate up rate down Reply
SPQR

I wonder whose fault it is that everyone ran out and bought an overpriced place to live or several places!! Everyone got greedy. It was Clintons fault for signing the Glass Stiegal bill out of existence

April 30 2012 at 8:14 PM Report abuse +3 rate up rate down Reply
jpark377

Gee, that socialism thing just doesn't seem to be working in Europe, you Obama Zombies, but I'm sure it'll work really well here.

April 30 2012 at 6:57 PM Report abuse +5 rate up rate down Reply
bdyftns

Spain in a recession? I'm shocked. Haven't we been reading this same article for about three years now?

April 30 2012 at 6:44 PM Report abuse +5 rate up rate down Reply