Spanish borrowing rates edge up on contagion fears

Spanish markets faced more selling pressure today as investors fretted about the future of the euro amid increasing concerns over Greece's future in the single currency bloc.

At one stage, the difference between the interest rates demanded by investors for Spanish and German 10-year bonds shot past the 500 basis point.

The so-called spread later eased to 490 but with mounting speculation that Greece may leave the euro in the coming months, it was a loud and clear signal that investors are getting increasingly fidgety about the survival of the currency.

The Spanish bond yield on the ten-year bonds, a gauge of investor confidence, jumped 14 basis points to 6.46 per cent shortly after trading began. The benchmark German bund was down at 1.45 per cent as the country benefited from its perceived safe-haven status.

The spread, or difference, between the two bonds was the highest since the euro was introduced in 1999. That matters because it not only raises the government's borrowing costs at the next bond auction but will also hurt businesses trying to find credit.

Emilio Ontiveros, head of Madrid-based consultancy AFI, said the spread had now broken through a key psychological barrier. A 500-point spread reflects uncertainty not just about Spanish public finances but about the Spanish economy in general, he said.

"Now, more than ever, it is necessary for the European Central Bank — the only entity with enough firepower to stabilize debt markets — to intervene consistently by buying bonds, not just Spanish ones but probably also Italian ones, and from then on give clear signals that maintaining the eurozone is a priority because otherwise Europe could fall apart," Ontiveros told Cadena SER radio.

A 10-year yield of 7 per cent is considered unsustainable over the long term. Greece, Ireland and Portugal were suffering such rates prior to seeking bailouts last year.

Spain's yield rose to a 6.7 per cent high last November prior to elections that saw the conservative Popular Party government sweep to power on promises of major reforms.

The reforms covering the labor and financial sector have so far failed to calm investor nerves or improve Spain's stricken economy, which is languishing under the weight of a 24.4 per cent unemployment rate. The economy is predicted to contract by 1.7 percent this year.

Two of the country's main problems are overspending by regional governments and banks burdened with billions of euros in bad loans following a real estate crash that started in 2008.

A major concern is that bank failures might swamp public finances and that the government will be unable to carry through its austerity measures and reforms.

The measures are aimed chiefly at slashing the government's deficit from 8.5 per cent of economic output to below the maximum level set by the European Union of 3 per cent by 2013. For this year, the goal is 5.3 per cent.

Today also saw Spain's Ibex 35 stock index down by 1.6 per cent in midmorning trading, continuing its strongly negative trend of recent weeks.

AP