Spanish borrowing cost jumps

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The eurozone debt market turned against Spain again on Monday, and also against Italy despite completion of a rescue for the bank-wrecked Irish economy on Sunday.

The rate Spain must pay to borrow for 10 years jumped to 5.330 percent, from 5.148 percent, and the difference over what eurozone benchmark Germany pays for 10 years widened to 2.58 percentage points, the biggest gap since 2002

The European Union said the effect of market tension in recent weeks was now a matter of "concern" for the prospects of growth in Europe.

It also took a more pessimistic view than Portugal and Spain over the outlook for their public deficits.

In France, Finance Minister Christine Lagarde rejected a suggestion in a newspaper that France might also eventually be threatened.

The main focus of attention was Spain, said by the Spanish government to be absolutely in no need of a rescue but feared by the markets to be too big for EU liferafts to keep afloat.

Italy, which was largely spared the turmoil and tension which has brought Ireland to its knees to ask for a rescue in the last two weeks and has put Portugal and Spain at risk, was also sucked into the storm.

The 10-year borowing rate for the Italian government rose sharply to 4.542 percent, the highest since June 2009.

In morning trading, even the rate Ireland must pay to borrow for 10 years rose to 9.137 percent from 8.877 percent late on Friday, the rate for Portugal rose to 6.971 percent from 6.690 percent.

The 10-year rate for Greece, rescued in May, also remained high at 11.735 percent.

Such rising pressure on bond yields, or rates, logged the descent of Greece and then Ireland into the arms of urgently created European Union and IMF rescue schemes.

In an important announcement to hold down uncertainty which has driven up risks on government debt markets, eurozone finance ministers said on Sunday that a permanent rescue facility would be created to take over from a temporary arrangement in 2013.

But from then on governments would be able to change loan agreements with investors to ensure that investors bore part of the costs of bailouts.

At Barclays Bourse in Paris, Franklin Pichard commented that "investors are waiting for a reply from Europe concerning the resolution of country systemic risk."

He said: "For the moment, the lack of precision about the setting up" of a new rescue fund after 2013 "is not calming concerns completely."

The new system would be activated case by case if a eurozone country got into financial difficulty, and the country concerned would negotiate new terms for repayments of its debt with private holders of its bonds.

Pichard said that the market would not wait until 2013 and wanted immediate clarification.

Analysts at Goldman Sachs said that the announcements on Sunday marked an attempt to tackle the effects of the crisis but investors should remain focused on Portugal and Spain in view of the Portuguese deficits and possible losses, so far not revealed, by Spanish savings banks.

© 2010 AFP

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