The yield on Spanish 10-year bonds shot up to a record 6.86 percent after a credit ratings agency downgraded the country’s debt rating to just one notch above junk status.
The interest rate demanded by investors rose 15 basis points after trading started on Wednesday.
Moody’s downgraded Spain’s sovereign debt from “A3” to “Baa3” on Wednesday, saying that the up to 100 billion euro (US$125 billion) bank bailout announced last weekend by eurozone leaders for Spain’s troubled financial sector would add to the government’s debt burden.
The bailout was meant to shore up the banking system and calm Europe’s debt crisis, but investors do not seem reassured and Spanish bond yields — a measure of investor jitters — have risen all week.
“While the details of the support package have yet to be announced, it is clear that the responsibility for supporting Spanish banks rests with the Spanish government,” Moody’s said in a note.
Moody’s said it put Spain on review for another possible downgrade in the coming months.
The agency expects Spain’s public debt ratio will rise to about 90 percent of its GDP this year and continue to increase until the middle of the decade.
Moody’s and other rating agencies have lowered their ratings on a number of European governments and financial institutions recently, given the economic turmoil in region.
The rating agency also downgraded the bond rating of Cyprus’s government on Wednesday by two notches to “Ba3” from “Ba1,” sinking it further into junk-grade status on the increasing likelihood that Greece would exit the euro.
Cyprus has heavy exposure to Greek banks and Greece’s exit from the euro would increase the amount of support that Cypress would have to extend to its banks at a time when the country’s finances are already strained and it has little access to international markets.
Moody’s said Cyprus’s rating is under review for further downgrades.