In morning trading the FTSE 100 index was up 77 points or 1.4%, while Asian markets were up around 2% in the previous session.
The bailout followed a week in which the eurozone crisis neared critical levels again, with Fitch’s downgrading of Spanish debt from A to BBB acting as a further prompt for more concerted action.
The downgrade saw yields on Spanish 10-year bonds rise above 6%, leading to serious concerns about the government’s ability to service its debts.
Prime Minister Mariano Rajoy finally gave into asking for help from the eurogroup to stabilise the country’s crippled banking sector, as it became clear earlier attempts to bail out strategically important Bankia had not done enough.
During the announcement Rajoy said the €100bn deal had "resolved" the crisis and said it should not be called a ‘bailout’ or ‘rescue’, but rather a ‘credit line’.
His reasoning behind this are the less strict conditions tied to the funding from the eurogroup, which are in part due to his own efforts to rein in the budget deficit.
"The eurogroup notes that Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital of the Spanish banks," said a statement issued by the group.
Healthy dose of scepticism
But commentators cautioned against too much optimism: "The funding will be provided at below-market rates and, we assume, long maturities, which takes the heat off Spain’s regular sovereign issuance. It is a signal of intent by eurozone powers that they want to stop the rot by pre-emptively deploying firewall resources.
"On the other hand, Spain’s banks are only one later of the economy’s shaky foundations. It still has the highest unemployment and the third widest fiscal deficit in Europe in the context of a painful recession. The current government has a poor track record of crisis management and data quality has been poor," said David Simner, portfolio manager, Fidelity’s Euro Bond Fund.
He added that the funding by the European Financial Stability Fund and European Stability Mechanism would inflate the government’s debt and raised questions of creditor subordination, with more downgrades likely.
Glenn Uniake, senior dealer at Moneycorp, was also skeptical: "This morning’s rally in the Euro has more than a whiff of deja-vu to it. It echoes, and makes about as little sense as, the response to last week’s cut in Chinese interest rates.
"Just as the Chinese decision was more an exercise in self-preservation than a boost to global demand, the idea that the Spanish crisis is suddenly solved is illusory.
"The bailout will also leave the ESFS fund all but empty, which will be an extra cause for concern now that market attention will, at least in the short term, move to Italy."
