Spain Debt Crisis: 10-Year Bond Yield Skyrockets As Fears Mount Over Bailout

Posted: 04/16/2012 4:22 am Updated: 04/16/2012 5:55 pm

MADRID - The interest rate on Spanish government bonds rose sharply on Monday, a sign that investors are becoming more worried about the country's ability to afford mounting debts as its economy shrinks.

The rate, or yield, on the country's 10-year government bonds jumped to 6.10 per cent on the secondary market, the highest since the country's new conservative government under Prime Minister Mariano Rajoy took office in December. Later on Monday, the yield dropped slightly to 6.02 per cent. It had closed at 5.93 per cent Friday after a week of persistent market tension.

The 10-year bond yield surged toward 7 per cent late last year, a level considered unsustainable for a country over a long period. Greece, Portugal and Ireland had to ask for bailouts after their yields stayed above 7 per cent.

Although the administration has implemented a barrage of labour and financial reforms, investors remain worried about Spain on several fronts:

— The country's banks are weighed down by a mountain of bad loans from the collapse of the property market in 2008.

— Many of the Spain's 17 semiautonomous regional governments have overspent wildly.

— Spain is expected to enter its second recession in three years this quarter, with the country's central bank forecasting its economy will contract 1.7 per cent this year. The unemployment rate is nearly 23 per cent, rising up to almost 50 per cent for those aged under 25.

The jump in Spain's yield comes at the beginning of a week in which the country's Treasury holds two rounds of bond auctions — 12- and 18-month bills on Tuesday, and benchmark 10-year bonds on Thursday.

The government insists it will have no trouble financing itself this year and that auctions held so far this year have gone well. But that changed almost two weeks ago, when a medium-term debt auction hit the bottom end of what the Treasury targeted, triggering the latest increase in yields and placing Spain firmly back into the centre of the eurozone debt crisis.

The situation was not helped by government-released data Friday showing the country's troubled banks borrowed a record €316.3 billion ($415.9 billion) from the European Central Bank in March, demonstrating the difficulty they have securing financing elsewhere.

Spain will probably step in and take over the finances of one or more of the country's debt-crippled regional governments before the end of the year, a senior Spanish government official told reporters Monday.

Some of the regions — which function like U.S. states but also control local spending of the national education and health care budgets — have lost access to financing on the debt markets and will soon be unable to pay their bills without central government assistance, said the official, speaking on condition of anonymity because of department policy.

Regions getting the financial lifeline would have their spending controlled by the federal government under recent austerity laws passed by the Rajoy government.

Monday's bond market jitters extended to Italy, viewed as another weak link in the 17-nation eurozone. Its 10-year bond yield rose to 5.60 per cent from about 5.57 per cent on Friday.

Spain's Ibex 35 trading index was down 0.6 per cent in late Monday trading after taking a punishing 3.6 per cent drop Friday.

After bailing out Greece, Portugal and Ireland, the eurozone has agreed to increase the size of its financial firewall to help out its members should they fail to raise money from the markets. But Spain's €1.1 trillion ($1.45 trillion) economy is twice the size of the previous three bailout victims put together. Analysts say the eurozone's €800 billion firewall is not large enough to deal with the potential threats coming from Spain and Italy.

Economy Minister Luis de Guindos travelled to Paris on Monday to meet investors to try to convince them Spain was on the right track. He will meet ECB President Mario Draghi on Tuesday.

Spain's plight is also likely to addressed at the meeting next weekend in Washington of the International Monetary Fund and World Bank.

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Associated Press writers Jorge Sainz and Alan Clendenning contributed from Madrid.

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Filed by Daniel Tencer  |