Concerns over Spain’s economy and fears that it might eventually be heading for a bailout pushed the country’s borrowing costs in the world’s financial markets higher on Friday.
Analysts blame Spain’s rising borrowing costs on doubts that the new conservative government is committed to meeting deficit reduction targets. The markets are also concerned that a global economic slowdown will push Spain to seeking a bailout package from the EU or the IMF.
The yield — the interest rate Spain would have to pay on its debt — for the country’s 10-year bonds hit 5.51 percent during the day on Friday after rising all week. Early this month, the yield was just below 5 percent. At the moment, there is a 3.54 percentage point difference between Spain’s yield and that of Germany, the strongest economy in the 17-country group that uses the euro as its currency.
There is concern in the markets that the rising yields could herald a rerun of the last months of last year, when worries over the fate of Greece and bailouts for Portugal and Spain spread to other, much larger eurozone economies. At the height of the crisis, borrowing costs for Italy and Spain on bond markets hit highs that would have been unsustainable without a bailout.
New austerity-minded governments in Rome and Madrid helped calm fears, but of far greater impact was the European Central Bank’s decision to flood the market with more than 1 trillion euros (US$1.3 trillion) in bargain-basement loans. This injection spurred banks to snap up battered government debt, driving Spanish and Italian borrowing costs down. Economists say that such relief is only temporary.
For the past two weeks, Spain has had a higher yield than Italy, which just months ago was thought to be the economy most at risk following the bailouts of Greece, Ireland and Portugal. On Friday, the Italian 10-year yield was 0.4 percentage points below Spain’s, at 5.14 percent.
On its own, Spain has a -eurozone-high unemployment rate of nearly 23 percent and first quarter figures are expected to show the economy has slipped into its second recession in three years.
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