Spain, Italy Worries Check European Gains

European shares rose on Monday following Greek election results that lessened the likelihood Greece would make a sudden exit from the euro zone, although persistent fears over Spanish and Italian debt problems limited the relief rally.

The FTSEurofirst 300 index was up 0.3 percent at 996.11 points by 1035 GMT, while the Euro STOXX 50 index dipped 0.2 percent.

During a volatile morning session, the indexes opened higher but then fell into negative territory after a rise in Spanish and Italian government bond yields before recovering ground.

Hartmann Capital trader Basil Petrides said equities markets had found some support from this week's meeting of leaders from the Group of 20 major economies in Mexico, with many expecting fresh injections of liquidity into global markets.

"The fact that the G20 is in the background, with their finger on the trigger, ready to act, is helping support equities markets," said Petrides.

Sunday's election in Greece gave a slim parliamentary majority to pro-bailout parties committed to keeping the debt-ridden country within the euro zone.

Athens' benchmark stock market index, which had fallen to historic lows, rose 6.3 percent while the Greek banking share index gained 13 percent.

"I bought some of the Greek bank stocks for some of our clients this morning, but I personally believe it still too early to get back into these sectors," added Petrides.


Analysts cautioned that despite the Greek election result, the euro zone crisis was far from over, with fears remaining over Spain's debt-ridden banks and worries that contagion from the turmoil might spread to Italy.

The rise in Spanish and Italian government bond yields caused a sharp underperformance in the stock markets of both countries, with the Spanish IBEX index down 0.9 percent and Italy's FTSEMIB index down 0.8 percent.

Spanish 10-year government bond yields rose 22 basis points on the day to 7.14 percent, pushing the nation's implied borrowing costs to their highest during the euro's lifetime. Greece, Ireland and Portugal were forced to seek international bailouts soon after their 10-year bond yields surpassed 7 percent.

Italian 10-year bond yields also rose 15 basis points to 6.08 percent. The 10-year Spanish yield premium over Italy rose to 108 basis points, also a euro-era high, according to Reuters charts.

Concerns over the European banking system were highlighted by Bank of Spain data on Monday, which showed Spanish banks' bad loans rose to 8.72 percent of their outstanding portfolios in April, the highest level since April 1994.

Analysts also cautioned that the political climate in Greece remained uncertain, with Greece's radical left SYRIZA bloc vowing to continue its opposition to the painful austerity measures demanded of the country.

Argonaut Capital Partners' Barry Norris said it remained too risky to buy into southern European equities and European bank stocks for now.

"After the initial relief, markets are likely to realise this Greek election result is unlikely to be a significant turning point. Southern Europe and Eurozone banks remain too risky," said Norris, whose firm manages around 1 billion euros ($1.26 billion) worth of assets.