Spanish borrowing costs have soared to a euro-era record high on a market beset by doubts over a vast rescue loan for the country’s banks and by fears of a Greek exit from the eurozone.
The euro came under more pressure in early trading yesterday, unconvinced by the deal struck by the 17 eurozone nations over the weekend to extend Spain a banking sector rescue loan of up 100 billion euros (US$125 billion).
Spain’s benchmark 10-year government bond yield spiked to 6.834 percent, the highest since the creation of the euro, and by late afternoon was at 6.716 percent — a rate regarded as unsustainable over the longer term.
The nation’s risk premium — the extra rate investors demand to hold its 10-year bonds over their safer German counterparts — hit 5.43 percentage points, not far from the euro-era record of 5.48 percentage points struck shortly before the banking rescue.
Two major concerns stood out: doubts over Spain’s outlook even with the eurozone rescue, and Greek elections on Sunday, which in a worst-case scenario could send Athens back to using the drachma.
Adding to Spanish agony, Fitch Ratings on Tuesday downgraded 18 more Spanish banks a day after cutting its ratings on the two biggest banks, Santander and BBVA, despite the massive sector bailout.
Meanwhile, Italian Prime Minister Mario Monti insisted that his country would not need a bailout to survive the economic debt crisis.
In an interview with German radio, Monti tried to damp down the rumors that Rome is at risk of contagion, calling on the markets and financial observers “not to be governed by cliches or prejudices.”
However, markets also punished Italy, at risk of being the next domino to fall in the eurozone crisis as it struggles to boost growth and confronts a public debt mountain of 1.9 trillion euros.
Italy’s 10-year government bond yield leaped to a high of 6.301 percent from the previous day’s closing level of 6.032 percent.