A surge in borrowing costs for Spain on Wednesday unsettled financial markets and showed that even if the European debt crisis was in remission, it was not cured.
A decision by the European Central Bank on Wednesday to leave its
main interest rate unchanged also reflected concerns about the
broader euro zone, where the economy was sputtering and credit was
still tight.
The Spanish debt auction came just days after the government of
Prime Minister Mariano Rajoy announced deep budget cuts meant to
reassure investors that Madrid could meet its deficit-reduction
targets. Spain sold EUR 2.6 billion, or $3.4 billion of debt, near
the bottom of its targeted range. Yields were higher than in recent
auctions as the government sought to counter falling demand amid
concerns about the effects of the budget cuts on an economy that was
sinking into its second recession in three years.
Following the disappointing bond auction, Spain's long-term
borrowing costs soared to their highest levels since December, with
the yield on the benchmark 10-year government bonds rising 25 basis
points, or 0.25 percentage points, to 5.7 percent. It had fallen as
low as 4.6 percent in January, when banks in Spain and elsewhere in
the euro zone started to buy more government bonds, using the
proceeds of low-interest loans provided by the European Central
Bank.
"There has long been a dearth of foreign buyers, so if domestic
buyers are now starting to retreat, the Spanish treasury has a
serious problem on its hands," said Nicholas Spiro, founder of Spiro
Sovereign Strategy, a London-based consulting firm specializing in
sovereign credit risk. "I think this is beginning of a new bout of
nervousness centered around Spain, but also possibly Italy."
In Europe, all major indexes fell 2 percent or more on Wednesday,
with the Euro Stoxx 50, a barometer of European blue-chip stocks,
slipping 2.5 percent and the FTSE 100 in London losing 2.3 percent.
In Frankfurt, the DAX tumbled 2.9 percent.
U.S. stocks were trading lower Wednesday afternoon, with the Dow
Jones industrial average down 1.1 percent and the Standard and
Poor's 500-stock average off 1.2 percent.
The decision by the E.C.B. governing council to leave its
benchmark rate at 1 percent, a record low, was expected. A rate
increase would have signaled the central bank's intention to tamp
down inflation in the 17-nation euro zone. At an annual rate of 2.6
percent in March, inflation is well above the E.C.B.'s target of
about 2 percent. But any concerns policy makers may have had about
prices were apparently outweighed by recent economic data showing
that the euro zone economy was stuck in recession.
Unemployment in the euro zone reached its highest level in 15
years during February, according to data published Monday. In
addition, recent surveys have shown that business managers have
grown more pessimistic and that credit is difficult to come by,
especially in countries like Spain that have been hardest hit by the
debt crisis.
Spain's problems, including the disappointing results of
Wednesday's debt auction, raised the possibility that the European
sovereign debt crisis could accelerate again, and contributed to a
sharp decline in main European stock indexes as well as the euro.
Asked at a news conference in Frankfurt about the Spanish bond
auction, Mario Draghi, the president of the E.C.B., warned countries
