News Column

Spanish Bonds Soar to Euro-era High

June 14, 2012
Spanish euro coin

Spain's borrowing costs soared to record level Thursday despite a rescue plan for the country's banks, fueling concern that the eurozone's fourth-largest economy might need a full-scale bailout.

The yield for 10-year bonds rose to about 7 percent for the first time since the creation of the euro, leaving the risk premium at 550 basis points.

Seven per cent is regarded as a watershed above which it will be difficult for Spain to avoid following Greece, Ireland and Portugal in needing a financial rescue.

Spanish Economy Minister Luis de Guindos and a European Union spokesman attributed the bond yield to the Greek elections on Sunday.

De Guindos called for "calm," saying the government was taking the necessary measures to cope with the situation.

Spain's borrowing costs were being pushed up by elements beyond its control, notably the elections in Greece, said Amadeu Alfataj, spokesman for European Economy Commissioner Olli Rehn.

The rise of the bond yield followed an announcement by the ratings agency Moody's that it had downgraded Spain's credit rating to just above speculative grade.

Spain's high borrowing costs contributed to the country's decision to seek up to 100 billion euros ($126 billion) in E.U. aid for its banks.

But the bailout announced Saturday has not eased market pressure, fuelling concern that Spain may need a full financial bailout. That could happen within six months, according to analysts at Saxo Bank.

Markets were uneasy over the lack of clarity about the bank rescue conditions, and over the likelihood that the bailout will increase Spain's budget deficit and public debt, analysts said.

Spanish Foreign Minister Jose Manuel Garcia-Margallo urged the European Central Bank to buy eurozone debt. An intervention by the ECB would be "all the more necessary" if anti-European parties win the Greek elections, he told the radio station Onda Cero.

Garcia-Margallo said he was "enormously worried" about "the message from Greece," echoing the sentiment across Europe.

"If (financial) markets see that one country can leave the eurozone, they will ask: and why not others?" he said, calling for unity among eurozone members.

He also expressed concern about "the risk premiums of certain countries rising up to the skies without anyone doing anything."

Prime Minister Mariano Rajoy's government maintains the bank bailout will only involve specific conditions for banks receiving aid.

But the E.U. was also expected to oblige Spain to carry out broader economic measures, such as raising value added tax and trimming the public administration, Spanish European Parliament member Alejo Vidal-Quadras said.

The International Monetary Fund, which will help the EU set the conditions for the bailout, was expected to demand a reform of savings banks, regarded as the Achilles' heel of the Spanish banking sector.

The bank restructuring fund FROB denied reports that it may close some of the banks that it administers or controls.

Moody's announced late Wednesday that it was downgrading Spanish government bonds another three notches, citing its intention to borrow money for its banks from European financial stability programmes and its "very limited" financial market access.

Moody's dropped the rating from A3 to Baa3, "one notch above speculative grade," it said.

Data released by the Bank of Spain meanwhile showed that the average net amount borrowed by Spanish banks from the European Central Bank increased from about 263.5 billion euros in April to 288 billion euros in May -- the largest amount until now.

Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH