Spanish debt rate hits eight-year high

29th November 2010, Comments 0 comments

Investors fled Spanish debt Monday, pushing 10-year bond rates to an eight-year high, as Ireland's 85-billion-euro rescue failed to stop fears the crisis may spread.

Markets are turning their focus to Portugal and Spain on concerns they could be the next dominoes to topple.

If Spain was to require an international rescue, it would dwarf those seen to date in Greece and Ireland. Spain's gross domestic product is twice that of Ireland, Portugal and Greece combined.

Investors demanded higher yields before taking a bet on Spanish debt, despite the authorities' argument that the country's economy is in no danger of needing a rescue.

Spanish 10-year bond yields rose in early afternoon trade to 5.330 percent, the highest since 2002. The Spanish yield was 2.58 percentage points above the rate demanded for safe-bet German bonds.

Fears about the consequences of any rescue of Spain's economy stalk financial markets.

The country's accumulated public debt is equal to 53.2 percent of annual output, well below the EU average of 74.7 percent.

But Spain's government has had to suspend dozens of road and rail projects and cut civil servants' wages to ease concerns about the bulging annual public deficit.

The government aims to bring the public deficit down to 6.0 percent of gross domestic product in 2011 and to the eurozone limit of three percent in 2013. The deficit hit 11.1 percent of GDP last year, the third highest in the eurozone after Greece and Ireland.

At the same time, the economy suffers from a 20-percent unemployment rate and posted zero economic growth in the third quarter.

If the European Union was called upon it could assist Portugal "without a cough of a shout," said Harold Wheeldon, senior strategist at BCG Partners in London.

"But when and if it comes to a debt market implosion in Spain EU ministers would find that they have a situation on their hands that may well be beyond their ability to resolve by agreement," Wheeldon warned in a report.

"Back to reality -- are we witnessing the early stages of a breakdown of the euro and indeed, possibly the European Union as well? Chances are that we really are," he said.

A report by Citi European Economics analysts said the deal struck for Ireland would likely provide enough financing for the Irish state and banks in the near term.

The big fear, it said, was that a special regime eventually would be introduced in Ireland requiring private bank bond holders to take a "haircut" -- in other words to accept less than full repayment.

Citi European Economics said private holders of bank bonds may be safe for now, but it believed they would likely be involved from 2013.

"Hence, unless the fiscally strained euro area countries can convince markets that they will be on a sustainable fiscal path by 2013 -- which looks unlikely to us -- peripheral bond markets are likely to remain under strain, in particular Portugal," the report said.

Moreover, because of uncertainties about whether a special regime in Ireland could later be introduced across the European Union, potentially hurting private holders of bank bonds, "market pressure on Spain might actually increase," it said.

© 2010 AFP

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