Spanish bond yields soar to record on bailout fears

Last Updated: Mon, Jul 23, 2012 19:02 hrs

Spain’s borrowing costs rose to record levels for a third consecutive trading day on Monday on concerns that a deepening recession and the financing problems of its regions would force the government to seek a full-fledged bailout.

Market regulators in Spain and Italy announced bans on stock short-selling, as Spanish turmoil and fresh concerns about Greece’s status in the Euro zone sent European stocks down broadly and sharply.

The yield, or interest rate, on 10-year Spanish government bonds was at 7.4 per cent in late afternoon trading on Monday, having breached 7 per cent last Thursday — a level that many analysts fear could eventually shut Spain out of public markets and force it to seek a Greek-style bailout.

The concern, though, is that Europe would be hard-pressed to find the money to salvage an economy the size of Spain’s — the Euro zone’s fourth largest after Germany, France and Italy.

Spain completed its third consecutive quarter of recession in June, according to data published Monday by the Bank of Spain. The economy contracted by 0.4 per cent from the previous quarter.

Stocks in Europe followed Asian markets sharply lower Monday, and the euro hit a new two-year low against the dollar. In late European trading, the main stock indexes were down more than 7 per cent in Greece; more than 3.5 per cent in Italy, 3 per cent in Spain and Germany, and more than 2 per cent in France and Britain.

Wall Street opened for trading with a skid, too, with the broad Standard & Poor’s 500-stock index down 1.5 per cent and the Dow Jones industrial average off more than 200 points in early action.

Helping stoke the turmoil, representatives from the trio of big lenders to Greece are set to arrive in Athens on Tuesday to examine that country’s progress on meeting the terms of its bailout programme. There are growing concerns that Greece will not be able to live up to its commitments and that as soon as September the so-called troika of lenders — the European Central Bank, the International Monetary Fund and the European Union — will refuse to dispense more money.

Last Friday, the European Central Bank said it was suspending loans to Greek banks.

In recent days, the troika of lenders have signalled that a decision on giving any more money to Greece, which is verging on bankruptcy and has survived on funds from European taxpayers for the last three years, will hinge on how the lenders’ examiners asses how well the Athens government is meeting its targets for budget cuts and other measures.

But Prime Minister Antonis Samaras is under pressure to make good on election pledges to soften some of the harshest austerity terms linked to Greece’s loans.

Depending on the findings of the troika’s report, “everyone will make their own decisions” about whether to extend more money to Greece, said a person involved with the lenders’ review, who was not authorised to speak publicly.

The IMF said in a statement that the fund was “supporting Greece in overcoming its economic difficulties,” adding that the review would be aimed at “how to bring Greece’s economic program, which is supported by IMF financial assistance, back on track.”

The fund has said it wants to see what sort commitment the government in Athens is making to carry out policies linked to its bailout before determining the nature of its involvement in Greece’s bailout.

On Monday, German officials continued to sow doubt about Greece’s future in the euro monetary union. The German finance minister, Wolfgang Schäuble, said in an in interview published Monday in the German tabloid Bild that Greece must renew its efforts to comply with the terms of its bailout. “If there were delays, Greece must make up for them,” he said. The German economics minister, Philipp Rösler, said separately that the prospect of a Greek exit from the euro had “lost its horror.”

The financial market pressure is reviving tensions between Spain and its European counterparts, amid growing calls from the government in Madrid for the European Central Bank to buy Spanish debt and help temper the country’s borrowing costs.

José Manuel García-Margallo, Spain’s foreign minister, said during the weekend that the ECB was acting as “a clandestine bank that is not doing anything for the debt.” The minister urged the ECB to deliver a decisive blow against investors “who have placed short-term bets, a bet against the euro.”

On Monday, however, Luis de Guindos, the economy minister, insisted that Spain would “of course” not seek a full bailout, having already requested up to €100 billion, or $122 billion, in European rescue money for its troubled banks. Just last Friday, Euro zone finance ministers agreed to release an initial €30 billion of that loan, although that has evidently not been enough to appease the financial markets. Before addressing lawmakers, de Guindos said that “the stance of the markets is irrational, extremely nervous and cannot be addressed by European governments.”

Meanwhile, a handful of regional governments are expected to follow the example of Valencia, which said Friday that it would be the first region tap into a new Spanish government fund to meet its debt-refinancing obligations, as well to as pay suppliers of health care and other basic services.

The government of the Murcia region said Sunday night that it continued studying whether to apply for aid from that same fund.

Officials in Madrid have been at pains to stress that the request by Valencia was precisely the sort of call for help that the regional assistance fund was set up earlier this month to address. The fund was created to help suffering regions and is to have €18 billion in capital, partly guaranteed by a loan from the state lottery company.

Still, Spain’s regions are struggling with a combined €35 billion in debt that is maturing this year. They are reaping the bitter harvest of a decade of ambitious but often unchecked spending on infrastructure and services, including unprofitable television stations and deserted airports.

The central government’s own deficit-cutting plans have fallen behind schedule, as a deepening recession has eroded tax receipts.

To counter this, Parliament on Friday approved a new austerity-budget package worth €65 billion that had been presented by Prime Minister Mariano Rajoy a week earlier. The package includes a controversial increase in the sales tax, as well as the removal of a Christmas bonus salary payment for civil servants that has triggered daily protests and road blockades in Madrid and other cities.

Spain’s budgetary and economic woes have also begun to overshadow its banking crisis. On Friday, Euro zone finance ministers agreed on an interim payment for Spain’s troubled banking sector of €30 billion, a day after the German Parliament signed off on the rescue package. Spain is yet to announce how much of the €100 billion of available banking funds it will request, and how that money will be distributed. Bankia, the giant lender whose demise prompted Spain to seek help, has itself estimated its overall bailout cost at €23.5 billion.

Last week, Cristóbal Montoro, the budget minister, forecast that Spain’s economy would shrink 0.5 per cent next year, compared with a previous forecast of 0.2 per cent in growth.

While Spain is the current focus of market concerns, investors are also worried that Italy, wrestling with its own debt problems, and the specter of an economic collapse in its autonomous region of Sicily, will be back in the spotlight soon. Its 10-year yield was up 0.28 per centage point in midday trading in Europe, at 6.35 per cent.

© 2012 The New York Times News Service

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