Markets suffer second thoughts over Greek deal

After a short-lived reprieve at the end of last week in the wake of the agreement on a second bailout package for Greece, the Spanish financial markets came under renewed pressure on Monday.

The spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent jumped back above 300 basis points at the start of the session and moved to almost 320 basis points when Wall Street opened. It eventually closed at 326 basis points, up 32 basis points from Friday's close.

One of the reasons behind the renewed nervousness of investors was Moody's Investors Service's decision to lower its credit rating for Greece three notches from Caa1 to Ca, just above default status, following a similar move last week by Fitch Ratings.

Moody's focused on the fact that the debt exchange proposal included in the second Greek package would entail losses for private investors determined by the face value of the debt they exchange and the market value of what they receive in turn. It noted the Institute of International Finance estimates these losses at over 20 percent.

However, Moody's reckons the debt swap will help stabilize Greece's financial situation and reduce its overall debt burden. It also contained the contagion on other euro-zone countries that would have resulted from a disorderly payment default.

Speaking in London, Spanish Prime Minister José Luis Rodríguez Zapatero defended the arrangement for Greece as "solid" and "detailed" and emphasized the participation of the private sector in the deal was "exceptional and one-off."

"The participation of the private sector is only for Greece because of the huge amount of its debt," Zapatero said at a joint news conference with British Prime Minister David Cameron.

The stock markets also came under pressure. After technical problems delayed the start of trading in Madrid, the blue-chip Ibex 35 index opened down about 1 percent and extended its losses by the early afternoon. The benchmark index eventually closed down 1.92 percent at 9,866.20. The Italian markets, which last week also bore the brunt of investor skepticism, remained under pressure. The FTSE MIB index closed down 2.47 percent, while the Euro Stoxx 50 lost 1.08 percent.

In Spain, the banks led the market lower following the Bank of Spain's decision after the markets closed on Friday to take over the savings bank Caja de Ahorros del Mediterráneo. Santander lost 3.21 percent and BBVA 3.48 percent