Spanish risk premium soars, PM interrupts holiday
Spain's debt risk premium shot to another record high Wednesday, forcing the prime minister to interrupt his holiday for a crisis meeting on the market turmoil.
The premium demanded for buying Spanish 10-year bonds over safe-bet German bonds surged Wednesday morning to 407 basis points -- the highest since the introduction of the euro in 1999.
It was the second day in a row that investors had pushed the premium on Spanish government debt to a record high, fearing that Madrid's problems will only get worse as economic growth slows.
The dangerous new turn in the eurozone debt crisis threw Prime Minister Jose Luis Rodriguez Zapatero's holiday plans into disarray.
After delaying his departure to Donana, southern Spain, for many hours Tuesday, he finally left late in the day but only to accompany his family. The same night, he returned to Madrid to cope with the crisis.
Zapatero will now meet Finance Minister Elena Salgado in the afternoon to "analyze the latest financial market movements," the prime minister's office said in a statement.
Government spokesman Jose Blanco will also attend.
The eurozone debt crisis has already claimed Greece, Ireland and Portugal, forcing them to seek bailouts from the European Union and International Monetary Fund.
There are growing fears Italy and Spain, the eurozone's third- and fourth-biggest economies, could be next in line, developments that would dwarf previous bailouts and could undermine the euro itself.
The market turmoil strikes at a delicate time in Spanish politics and finances, with a government bond auction scheduled for Thursday to raise 2.5-3.5 billion euros ($3.6-5.0 billion).
The economic crisis led Zapatero on Friday to call general elections for November 20, four months early, in which he will not run.
He is giving updates to his former deputy, Alfredo Perez Rubalcaba, who is now the ruling Socialist Party candidate for premier, and to the leader of the conservative opposition Popular Party, Mariano Rajoy.
Moody's Investors Service warned Friday that it planned to downgrade the country's "Aa2" credit rating.
Spain, with an economy the size of those of Greece, Ireland and Portugal combined, argues it it should not be lumped together with the three lame ducks now under EU nion and IMF rescue programmes.
It argues it has pursued tough reforms including lowering the retirement age, relaxing collective bargaining rules, making it easier to hire and fire employees, cutting civil servant wages, forcing banks to bolster their balance sheets and placing assets such as the national lottery on the block for sale.
But Spain, like Italy, continues to suffer from the risk of contagion from the eurozone debt crisis.
Moody's said that the pressure on Madrid could be exacerbated by fears over the new European deal to rescue Greece which had "created a precedent" by involving the private sector and signaled a growing risk for investors holding bonds in the fragile countries of the eurozone.
A July 21 summit of eurozone policymakers, where they agreed alongside the private sector to pour another 159 billion euros ($226 billion) into Greece, was supposed to stop debt contagion spreading across Europe.
But "doubts remain as to the debt sustainability of Greece, the ability of Italy and Spain to fund deficits and roll(over) debt, and the ability to reduce unsustainable external imbalances among EMU (European monetary union) countries," Deutsche Bank said in a report.
The bank said increasing European support mechanisms to match those countries' funding needs was not the answer.
"Rather, the funding needs of these countries have to be brought down to the limited financial support available from the financially strong countries," it argued.
© 2011 AFP