The euro fell to the lowest level against the dollar this year, Spanish shares slumped and its benchmark borrowing costs spiked as investors switched focus to yet another indebted European economy as the region's financial crisis intensifies.
Spain's 10-year bond yields surged past 6 percent for the first time since late April after several media reports suggesting its major banks will need to raise an extra €35 bn to cover losses linked to bad property and real estate loans. The tab, expected to be announced by Spain's Economy Ministry Friday, would take the total recapitaization bill to €90bn and pile further pressure on an already stressed economy struggling under the weight of recession and 25 percent unemployment.
Spain's benchmark stock index, the IBEX, sank 3.3 percent, led by steep declines for banking shares, to trade at 6,770.4 by 1130 GMT. The index has fallen more than 22 percent this year and sits at a 3-year low. Broader European share performance was weaker for the third consecutive session as the FTSE Eurofirst 300 fell 1.04 percent to 1,006.85 and the lowest level of the year.
The UK's FTSE 100 index, a much better indicator of global economic activity than domestic fiscal health, shed 1.14 percent, or 63 points, to trade at 5,491, erasing all of this year's gains and tracing back to levels last posted in December 2011.
The European single currency extended Tuesday's losses, falling a further 0.50 percent to trade at 1.2940 against the U.S. dollar, marking the lowest level of the year and the longest stretch of declines in at least 3.5 years.
For a breakdown on the day's major news events, click here.
The efforts to shore up the balance sheet of Spain's banks comes as Moody's Investors Service is expected to begin a wholesale process of revisions on the credit ratings of some of the world's largest banks to reflect the extra capital they will require to meet new global rules. The downgrades, which the ratings company said last month would begin in early May, are likely to put upward pressure on banks' short-term funding costs and crimp lending into the broader economy.
Investors' risk-aversion to the headline news flow lifted German Bund futures to another record Wednesday as the June contract touched 143 in Frankfurt trading. The moves helped push yields lower in the cash market, as well, where Germany's 10-year bund fell to an all-time low of 1.49 percent. Germany sold just over €4bn in five year debt, known as bobls, at an average yield of 0.56 percent, the lowest-ever for a five-year debt sale. The so-called bid-to-cover ratio, a gauge of investor demand, was 1.4, meaning investors bid €1.40 for each €1 offered from sale from Germany's Debt Management Agency.
UK Gilt yields also fell in an active bond market session after a well-bid auction of 30-year government bonds. The UK's Debt Management Office, which handles bond sales and auctions for the Treasury, sold £2bn worth of 30-year Gilts at an average yield of 3.22 percent. Investors bid for more than 2.2 times the amount offered for sale. Britain's 10-year benchmark Gilt yields fell to a record low 1.899 percent following the auction.
Headline risk from Greece also shows little sign of abating after news this morning that Syriza leader Alexis Tsipras was unlikely to find common ground among his political rivals and would fail in his attempts to form a coalition government, setting up a likely second call to the polls for Greek voters in mid-June.
However, the strident tone Tsipras has taken -- and his strong showing at Sunday's vote -- has increased concerns that Greece will not be able to meet the agreed spending cuts linked to its €174bn EU/IMF bailout.