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Spain will set out today its austerity budget for 2013, against a backdrop of a deteriorating economy and 25% unemployment rate.

Madrid is expected to outline 39 billion euros ($50 billion) worth of savings, tax rises, and structural reforms.

It comes amid further protests this week, and growing expectations that Spain will seek a bailout from its eurozone partners.

On Friday, results of a stress test on Spain’s banks are due to be released.

The Spanish stock exchange’s Ibex index held steady in morning trading on Thursday, having lost 3.9% the previous day.

Other European stock markets experienced modest rebounds of about 0.5%.

Spain will set out today its austerity budget for 2013

Spain will set out today its austerity budget for 2013

Stocks fell sharply on Wednesday, as markets were rattled by violent protests in Madrid and Athens, as well as a statement from the Spanish central bank that the country’s economy had continued to shrink in the third quarter of the year.

However, the more optimistic sentiment was boosted on Thursday when the Greek finance minister, Yannis Stournaras, said that a “basic agreement” had been reached with lenders on the austerity measures required for the release of Greece’s next tranche of bailout money.

On the bond markets, the Spanish government’s long-term cost of borrowing stabilized in early trading, at an implied interest rate of just over 6% for 10-year debt.

The 10-year rate had risen by a quarter percentage point on Wednesday, as lenders’ fears over the government’s ability to repay its debts, or stay within the euro, resurfaced.

However, it seems investors are losing patience.

Spain will hope that Thursday’s austerity measures will mean fewer economic conditions if it asks for a second bailout.

Prime Minister Mariano Rajoy fuelled expectations that Spain would ask for a bailout when he told the Wall Street Journal on Wednesday that if borrowing costs were “too high for too long”, then “I can assure you 100% that I would ask for this bailout”.

The economic situation remains grim, with comments from the central bank on Wednesday indicating that the country’s recession deepened in the last three months.

“Available data for the third quarter of the year suggest output continued to fall at a significant pace, in an environment in which financial tension remained at very high levels,” the Bank of Spain said in a monthly report.

Last week, Spain’s second biggest bank, BBVA, estimated that up to another 60 billion euros ($78 billion) will be needed to bail out the banking sector.

About 20 billion euros has already been allocated to troubled banks.

Spain, the eurozone’s fourth largest economy, fell back into recession in the last quarter of 2011, the second recession since the bursting of the country’s property bubble.

But with a shrinking economy and unrest in the country, reducing the deficit via further austerity measures may prove a difficult task for the government.

The government has predicted a budget deficit this year of about 6.3%, but many analysts estimate it will be nearer 7% or higher.

The basic outline for the budget has been known since July, but not exactly where the cuts and savings will come from.

There has been speculation that the budget could include such measures as taxes on shares transactions, “green taxes” on emissions or eliminating tax breaks, and even possibly ending inflation-linked pensions.

Madrid has already said that it wants to claw back a total of more than 150 billion euros between 2012 and 2014: 62 billion euros this year, 39 billion euros in 2013, and 50 billion euros in 2014.

But many analysts remain skeptical that this will be enough to resolve Spain’s economic woes.

Despite the public anger, PM Mariano Rajoy said sacrifices were necessary.

“We know what we have to do, and since we know it, we’re doing it,” he said in a speech in New York.

“We also know this entails a lot of sacrifices distributed… evenly throughout the Spanish society,” he said.

But Boris Schlossberg, managing director at New York-based BK Asset, said: “Spain is in a vicious cycle, because austerity is hurting economic activity and revenues, which causes greater fiscal gaps.”

“People are starting to realize this, and the political will to absorb these sacrifices is diminishing by the hour,” he said.

 

European markets have fallen after the European Central Bank (ECB) president Mario Draghi said the bank would come up with ways to help struggling eurozone countries “over the coming weeks”.

Analysts had been hoping for more details and immediate action.

Help from the ECB would also only be given if the governments themselves made certain commitments, he said.

The Spanish and Italian stock markets fell sharply while both countries’ borrowing costs rose sharply.

Earlier, the ECB kept the main eurozone interest rate at a record low of 0.75%.

There had been hopes that Mario Draghi could announce immediate measures to bring down the cost of borrowing for some of the eurozone’s struggling members.

“What we have expressed is guidance, and strong guidance, about strong measures which will be completed in the coming weeks,” Mario Draghi said.

High borrowing costs have been at the centre of the eurozone crisis, with countries needing bailouts when the yields on their 10-year bonds have been consistently above 7%.

Bond yields are taken as indicators of what interest rate governments would have to pay to borrow money.

European markets have fallen after the ECB president Mario Draghi said the bank would come up with ways to help struggling eurozone countries "over the coming weeks"

European markets have fallen after the ECB president Mario Draghi said the bank would come up with ways to help struggling eurozone countries "over the coming weeks"

Mario Draghi said that the high yields on some eurozone government bonds were unacceptable, adding that, “the euro is irreversible”.

He said the ECB may intervene in the bond markets to support struggling nations.

But having fallen in recent days due to the anticipation of ECB support, Spain’s 10-year bonds rose above 7% after Mario Draghi spoke, having been at 6.6% before he started.

“Once again, we have no commitment to action from the ECB, and no execution of promises previously made,” said Carl Weinberg, chief economist at High Frequency Economics.

“Traders and investors who expected immediate action are, and should be, disappointed. More scolding of governments, but no ECB action, is the bottom line.”

The yield on Italian 10-year bonds rose from 5.7% before Mario Draghi spoke to 6.2% afterwards.

But yields on short-term bonds fell, reflecting Mario Draghi’s plans to buy them instead of longer term debt.

Some analysts were more positive about Mario Draghi’s comments.

“This is a revolutionary policy, as far as the ECB is concerned. It means the ECB plans to go into the markets and buy bonds, of two to three-year durations, in very substantial quantities,” said Nick Parsons at National Australia Bank.

“These are potentially unlimited and should be big enough to have the desired effect. Mr. Draghi is certainly on the right track.”

At his press conference, Mario Draghi said that the ECB’s bond-buying process would resume, but that it would be different to the Securities Markets Programme (SMP), which involved buying large quantities of government bonds from banks and other financial institutions on the open market.

Mario Draghi said that the new scheme would involve buying shorter-term bonds, which should allay some of the fears of the German government, worried about having to guarantee debts of weaker countries for years.

Governments, however, would also first have to apply for help from one of the eurozone’s rescue funds, the European Financial Stability Facility or the European Stability Mechanism, he said.

They would also have to demonstrate they were making necessary changes.

“Policymakers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination,” he said.

Currently, the European bailout fund – the EFSF – and its delayed sister fund – the ESM – would require any country seeking help to sign a memorandum of understanding, or promise to carry out certain measures such as cutting spending or raising taxes.

When asked whether Spain, and Italy would, therefore, have to submit to similar strictures imposed on Portugal, Ireland and Greece before the ECB could act to buy their bonds, Mario Draghi replied: “Yes, that is exactly how you should see it.”

There were also signs of continued division on the ECB governing council.

Asked whether the ECB’s decisions had been unanimous, he replied: “The endorsement to do whatever it takes to preserve the euro as a stable currency has been unanimous.”

“But it is clear, and it is known, that Mr. Weidmann [ECB member and head of the German bank] and the Bundesbank have their reservations… about buying bonds.”

The ECB, which sets the cost of borrowing for the 17 countries which use the euro, cut its key rate from 1% to 0.75% last month, to try to bring down borrowing costs and stimulate economic activity.

 

 

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Signs of economic weakness around the globe and Europe’s intensifying debt crisis are unnerving investors, who have been piling out of riskier investments like commodities and equities for the perceived safety of higher-rated government bonds.

U.S. banking stocks are heading into a bear market as Europe’s debt crisis pressures the sector. The KBW Bank index , which measures the performance of 24 U.S. banks, is down 16 percent from a peak in March. The index was down 1.2 percent just after the open on Monday.

Morgan Stanley has come under pressure as bond markets treat the bank as a junk-rated company, and the higher borrowing costs could already be putting it at a disadvantage even before an expected ratings downgrade. The bank’s stock is off 40 percent since late March.

“We may well have a snap back rally on the equity side but I don’t think it will be a big one, there is still a lot of caution out there,” said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago.

“All we’ve really done is seen some short covering here in the stock indexes and we are just stable, bonds are still very elevated.”

With little on the economic or corporate calendar Monday, investors are taking most of their cues from any comments out of Europe.

 “Europe is front and center, back, left and right,” said Dan Greenhaus, chief global strategist at BTIG.

Germany’s DAX lost 0.9% to 5,993 and Switzerland’s SMI shed 0.6% to 5,741, though France’s CAC-40 managed to rise 0.5% to 2,968.49. Markets in Britain were closed for a holiday.

Peter Cardillo, chief market economist at Rockwell Global Capital in New York said he was watching 1,275 as a support level on the S&P 500 after the index broke through its 200-day moving average on Friday following the worst decline for the index in 7 months.

“If we close under that tonight, then the market is headed lower in the short-term, possibly by 3 or 4 percent,” he said.

In a potential boost for markets looking for measures to end the debt crisis, German Chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage euro-area finances, and major new powers for the European Commission, European Parliament and European Court of Justice.

Three leading Portuguese banks said on Monday they would draw on funds provided under the country’s 78 billion-euro ($96-billion) international bailout to meet tough new capital requirements as they struggle with the country’s debt crisis.

 

Stock trends

 

Investors sold shares in Asia as well, including stock in Sony, which fell below 1,000 yen for the first time since 1980 — the year after it introduced the iconic Walkman portable cassette player.

Japan’s Nikkei 224 index dropped 1.7% to close at 8,295.63, its lowest finish since Nov. 28, 2011. The broader Topix index ended below the 700 mark for the first time since December 1983, Kyodo News Agency said.

Japan’s shares fell sharply on Monday, with the broader Topix index hitting a 28-year low as investors reacted to the disappointing Friday U.S. jobs data.

“While we are not down 20 percent and in official bear market territory, we believe that we have entered a bear market,” wrote Wayne Kaufman, chief market analyst at John Thomas Financial in a note on Monday.

“Equities have not responded to oversold conditions or to very attractive valuations versus bonds, and we must take that as a warning,” he said.

There are also worries about slowing growth in emerging markets such as China and India. Recent reports out of China last week showed the manufacturing sector contracted more than expected in May.

 

The S&P 500 (SPX) lost 3 points, or 0.1%. The Nasdaq (COMP) moved down 3 points, or 0.1%. The Dow Jones industrial average (INDU) dropped 24 points, or 0.2%.

 

Facebook IPO aftermath

 

Companies: Shares of Facebook (FB), which have gotten hammered since the company’s IPO, edged slightly lower.

Groupon (GRPN) shares added 0.6% after dropping sharply Friday. The online discount service, which has been dogged with questions about its accounting practices since its initial public offering in November, ended its lock-up period Friday, meaning that insiders who own shares are now able to sell them.

 

Currencies and commodities

The dollar rose against the euro and Japanese yen, but fell versus the British pound.

Oil for July delivery lost 23 cents to $83.47 a barrel.

Gold futures for August delivery lost $2.60 to $1,614.60 an ounce.