June 20, 2012
Fears of a full-scale bailout for Spain have mounted as its borrowing costs remained at danger levels on concern over the nation's stricken banks and fast-rising debt.
After Greek elections averted the immediate threat of Athens exiting the eurozone, concern turned to Spain where the banks have been thrown a eurozone lifeline of up to 100 billion euros ($A125 billion).
As Greece's pro-bailout parties negotiated the terms of a coalition government, Spain's troubles mounted.
Tapping the markets for the first time since the Greek vote on Sunday, Spain raised 3.04 billion euros, beating its 2.0-3.0 billion euro target in an auction of 12- and 18-month notes.
But it had to pay exorbitant rates to lure investors - 5.074 per cent for 12-month debt and 5.107 per cent for 18-month debt.
The yield on Spanish benchmark 10-year government bonds shattered the 7.0 per cent barrier on Monday for the first time since the creation of the euro in 1999, pushing above 7.2 per cent.
On Tuesday, the yield on 10-year bonds was at 7.003 per cent.
"It now appears inevitable that Spain will require a sovereign bailout, possibly very soon," said Capital Economics chief European economist Jonathan Loynes.
Rising bond yields reflected a belief that the banking bailout, agreed with eurozone partners on June 9, would not address broader fiscal problems, he said.
Spain's plan to cut the public deficit from 8.9 per cent of economic output last year to 5.3 per cent this year and 3.0 per cent in 2013 relied on a "very unlikely" recovery from recession next year, Loynes said.
Markets held out little hope for quick help from Europe.
The leaders of Italy, France, Germany and Spain will hold a summit on the eurozone crisis on June 22 in Rome, ahead of a full European Union summit from June 28-29.
Kathleen Brooks, research chief at brokerage Forex.com, said Spain could avoid a rescue only if its debts were underwritten by stronger eurozone partners and if the European Central Bank bought its debt.
"But at the rate its yields are rising, Spain doesn't have enough time to wait for Europe's politicians to decide whether or not to underwrite the debts of the weakest states, it needs action now."
Spain, the eurozone's fourth-biggest economy, faces its next debt market test on Thursday, when it will try to raise up to two billion euros in a mix of two-, three- and five-year bonds.
In a sign that the crisis is reaching into the heart of the eurozone, investor confidence in Germany took its steepest fall in 14 years in June, according to a survey.
The ZEW think tank's economic expectations index, having fallen by more than 12 points last month, plunged a further 27.7 points this month to minus 16.9 points, the lowest level since January.