Madrid may have to seek help as debt costs soar and stock market plunges
SPAIN’S ability to manage its debt without an international bail-out was thrown into doubt yesterday after investors pushed its borrowing rates up to the level at which Greece, Portugal and Ireland sought help.
Investor sentiment improved briefly yesterday morning as electoral results in Greece suggested the country would not drop out of the euro currency union, a scenario that would have put severe stress on Spain’s markets.
But that market relief quickly transformed into concern in Madrid as it became clear that Spain’s fundamental economic problems remain huge.
The interest rate on Spain’s ten-year bonds – an indicator of market confidence in how well a country can pay down its debt – hit a fresh eurozone era high of 7.18 per cent before easing in the afternoon and closing at 7.12 per cent. Stocks plunged 3 per cent on Madrid’s main index.
The bond yield’s alarming rise put it firmly in the range that prompted the other three countries to ask for a bail-out.
While Spain would be able to afford the current high rates for a few weeks at least, it would find them too expensive in the longer term. If the bond rates do not fall back down, Spain may have to ask for foreign aid to finance itself.
Andrew Wilkinson, chief economic strategist at trading firm Miller Tabak & Co, said it is impossible to know how long Spain – which will tap bond markets today and Thursday – can pay the current rates before needing a rescue.
“It could go through a few [bond auctions] before you’d argue that this is unsustainable,” he said. “It’s like applying a vice to a prisoner and making him squeal. How much can he take?”
Spain has already requested a bail-out for its banking sector, which is saddled with billions of euros in soured investments after the implosion of a real estate bubble.
But because the government is ultimately responsible for repaying the banks’ bail-out money, the deal has increased fears about the size of public debt.
If the government – already struggling with a second recession in three years and unemployment of nearly 25 per cent– cannot get the bail-out money back from the banks, it will be saddled with the losses, which may prove too much for it to handle.
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Sunday 19 May 2013
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