Spanish debt risk premium hits new record
Spain's debt risk premium shot to a record high Monday as financial markets turned their fire on the crisis-hit economy six days before a general election.
Spain had appeared to have largely escaped the wrath of the markets, consumed by an unravelling Greek rescue plan and political chaos in debt-burdened Italy.
But less than a week before November 20 general elections, widely expected to deliver a landslide victory to the opposition conservative Popular Party, Spain's government bonds took a hit.
The risk premium, the extra return investors demand to buy Spanish 10-year government bonds over comparable safe-haven German debt, hit a euro era record of 4.30 percentage points.
The 10-year Spanish government bond yield broke the 6.0-percent barrier for the first time since August, bad timing for Spain which holds bond auctions this week to raise up to 7.5 billion euros ($10 billion).
The Spanish stock market's IBEX-35 index of leading shares dropped 2.15 percent to close at 8,372.2 points.
"In the past few weeks Spain got through these tensions with greater calm than other countries that were in the eye of cyclone such as Italy," said French bank Natixis' southern Europe analyst Jesus Castillo.
"It is because there is a real process of rebalancing of public finances that is going on," he said.
The eurozone crisis was clearly not confined to one or two countries, analysts said.
"We can see that we are not dealing just with Italy," said brokerage IG Markets's analyst Soledad Pellon.
"There is a massive contagion effect."
Swiss bank UBS had already warned in a report issued Friday that the market attitude to Spain was fairly optimistic when compared to Italy and could change "in the next months, or weeks".
Just a few days later, Spain's bonds were hammered.
Despite Greece and Italy installing new governments to fight debt and reassure investors, the latest attacks were a reminder that the fragile economies of the eurozone remained in the firing line.
Spain's general elections were brought forward from March 2012 partly as a response to the market pressure against the ruling Socialist government, Pellon said.
The right, which has promised a new austerity programme, is expected to storm to victory by a record margin, with an absolute majority in parliament and the ability to ram through reforms almost at will.
But first investors want to see if Spain really wants to change its situation, and they are putting on the pressure early, Pellon said.
Confronted by Greece, Italy and now Spain, "the markets don't want any of these three countries to go to sleep, they want them to carry on along the road they have taken," she said.
Those concerns may be felt this week when the Spanish Treasury seeks to auction up to 3.5 billion euros in 12- and 18-month bills Tuesday and up to 4.0 billion euros in 10-year bonds on Thursday.
UBS analysts said there were three good reasons to be worried about the Spanish economy:
- The concern that Spain, struggling with weak economic growth, may miss its targets of cutting the public deficit from 9.3 percent of gross domestic product last year to 6.0 percent this year, and 4.4 percent in 2012;
-- The widely cited risk that Spain's stalled economy may fall into recession next year;
-- And the prospect of more state money being needed to help Spain's banks, which still carry on their books masses of bad loans from the 2008 property bubble collapse.
© 2011 AFP