Markets put Italian, Spanish debt under pressure again

2nd August 2011, Comments 0 comments

Italy and Spain came under fresh pressure Tuesday on the financial markets as nervous investors sold down their bonds on concerns that their debt problems will only get worse as economic growth slows.

In mid-morning trading, the benchmark Spanish 10-year benchmark government was yielding 6.326 percent, a rate up sharply from 6.180 percent late on Monday.

The yield -- the rate of return earned by the holder -- on the Italian 10-year bond rose to 6.165 percent from 5.988 percent.

Investors demand higher returns as they see risk increase and yields of 6.0 percent or more are widely considerd to be unsustainable for a eurozone country.

At the same time, the spread with the equivalent 10-year bond issued by Germany, the strongest eurozone economy, widened to 3.93 percentage points for Spain and to 3.74 percentage points for Italy, showing how the two countries have to pay much more than Germany to borrow funds.

The eurozone debt crisis has already claimed Greece, Ireland and Portugal, forcing them to seek bailouts from the European Union and International Monetary Fund and there are growing fears Italy and Spain could be next in line.

Dealers said recent signs that the global economy is slowing, combined with very sickly growth rates in the two countries, has increased fears that they will not be able to put their strained public finances on a sound footing despite radical austerity programmes.

They said investors were accordingly seeking safety in stronger countries' debt or in gold, the traditional safe haven in times of trouble.

"It is not easy to see when this trend will end, especially if upcoming economic data contains more bad surprises," BNP Paribas analysts said in a note.

Governments issue debt bonds to borrow money for a fixed period at a fixed issue interest rate to finance their annual overspending.

If the perceived risk attached to the bond rises, investors turn away from the instrument which then falls in price on the market, thereby automatically raising the fixed interest as a percentage of the new lower bond price.

This new yield signals the rate of interest that the government concerned would have to offer to raise new funds.

© 2011 AFP

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