The yield on Spain's benchmark ten-year bond spiked 0.23 percentage points to 7.46 per cent, further evidence that investors are skeptical about the Spanish government's ability to get a handle on its debts at a time of recession and sky-high unemployment. Worries over the financial health of the Spanish regions have contributed to the latest spike too.
Those concerns have swelled after the Bank of Spain said the Spanish economy contracted by a quarterly rate of 0.4 per cent in the second quarter — falling economic output makes it even more difficult for Spain to deal with its debts.
If Spain's borrowing rates continue to rise — it's not just the ten-year bond that's seeing higher yields — then Spain may end up being locked out of international markets and be forced to seek a financial rescue, just like Greece, Ireland and Portugal. Spain's 10-year yield is at its highest level since the euro was established in 1999 and above the 7 per cent level that prompted the others to request a bailout.
"The higher the yield goes, the more untenable the situation becomes," said Rebecca O'Keeffe, head of investment at Interactive Investment.
Spanish stocks also took a hit as the country's borrowing rates pushed higher. The Ibex 35 stock index in Madrid was down 3.8 per cent in morning trading.
The latest round of jitters in the markets come barely a month after the leaders of the 17-country eurozone agreed a package of measures designed to instil confidence in the markets. Eurozone partners also agreed to lend Spain up to €100 billion ($122 billion) in funds to bail out banks laden down with toxic assets following the collapse of the country's real estate bubble over the past four years.
Economy Minister Luis de Guindos is due to appear in Parliament later in the day to explain details of the rescue package for the banks.
For its part, the Spanish government has pushed through another round of austerity and structural reforms in a bid to convince investors. However, opposition to the government's strategy is increasing, especially as the country is mired in its second recession in three years and weighed down by an unemployment rate of nearly 25 per cent.
Another of Spain's chronic problems is now beginning to rear its ugly head — debt-wracked regions.
The 10-year bond spread jumped above 7 per cent last Friday after the eastern Valencia region revealed it would need a bailout from the central Madrid government. Over the weekend, the southern region of Murcia said it may also need help. Speculation is now strong that several other cash-strapped regional governments may follow.
A fund for Spain's 17 regions was created on July 13 and will have €18 billion ($22 billion) in capital.
Many Spanish regions are so heavily in debt due to the recession and the burst real estate bubble that they cannot raise money on their own.
Investor concern about regional debt grew when the central government was forced to revise Spain's 2011 budget deficit upwards for a second time to 8.9 per cent in May — an embarrassing adjustment that had to be made after four of the regions confirmed they had spent more than previously forecast.