Lukewarm response from markets to new austerity drive

The reaction of the Spanish financial markets to the increasingly drastic attempts of the administration of Prime Minister Mariano Rajoy to tame the budget deficit was largely cautious on Wednesday.

Investors are concerned that Rajoy’s latest genuflection at the altar of fiscal propriety in the shape of budget measures worth some 65 billion euros in return for a bailout for the country’s banks and some slack on meeting the deficit target will exacerbate the economic crisis at a time when the country has already slipped back into recession for the second time in only three years.

The yield on the benchmark 10-year government bond eased to 6.577 percent, which helped the sovereign risk premium to narrow by 18 basis points to 531 basis points.

The response of the stock market was also somewhat timid. The blue-chip Ibex 35 closed up 1.17 percent at 6,805.90 points, off an intraday high of 6,829.70 points. Nationalized Bankia, the main reason behind the need for the bank bailout, closed down 7.77 percent at 0.772 euros, the lowest closing price since it was listed in July of last year.