Spanish borrowing costs shoot to euro-era high

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Spain's borrowing costs shot to a euro-era record on Thursday as a market crisis lurched into dangerous new territory three days before general elections.

Spain paid sky-high rates in a bond auction -- close to levels that triggered collapses in other eurozone nations -- and its debt risk premium struck the highest level since the launch of the euro.

Investor fear has spread rapidly through the single currency area, from Greece and Italy to Spain, which faces general elections on Sunday, and even AAA-rated France.

"The basic question is what is going to be done about Italian and Spanish bonds," said Edward Hugh, independent economist based in Catalonia.

"Is the ECB going to continue buying or is another formula going to be brought forward?," he asked.

"There seems to be a complete silence at the moment."

Markets were waiting for a clear answer from German Chancellor Angela Merkel and French President Nicolas Sarkozy, he said, and they were disturbed by reports of differences between the two leaders.

Despite Merkel's proclamations in favour of the euro, investors were not convinced that Germany was prepared to put real money behind the single currency, he said.

"Normally when there is a currency there is a government that stands behind it. Who stands behind the euro?," Hugh said.

"You cannot restore confidence in the currency without a government putting money on the table."

Spain's Treasury had to pay a rate of 6.975 percent -- near levels considered unsustainable of 7.0 percent -- to raise 3.563 billion euros ($4.8 billion) in an auction of 10-year bonds.

On the markets, traders inflicted more punishment.

Spanish government 10-year bonds changed hands for yield of 6.732 percent -- the highest since May 1997 in the days of the peseta.

The debt risk premium -- the extra rate charged on Spanish 10-year government bonds compared to safe-haven German bonds -- leapt to a euro-era record of 4.9714 percentage points.

The sense of crisis hounded the ruling Socialists in their last days before Sunday's election.

Polls show hard-hit voters ready to punish Prime Minister Jose Luis Rodriguez Zapatero's government over the crisis, delivering a likely landslide win to opposition leader Mariano Rajoy.

Spain has an unemployment rate of 21.5 percent -- the highest in the industrialised world -- and its economy stalled in the third quarter with analysts predicting recession ahead.

Equally seriously, even the European Commission has forecast that Spain will miss its targets to trim the bloated public deficit from 9.3 percent last year to 6.0 this year and 4.4 percent in 2012.

Rajoy, leader of the conservative Popular Party, is promising a harsh regime if he wins.

"I have already said that my first priority is to maintain the purchasing power of pensions. From that point, we must make cuts everywhere," he told centre-left daily El Pais.

He vowed to meet the 2012 deficit target.

"Everyone must know that for my government, the priority will be keeping Spain's commitments to Brussels."

© 2011 AFP

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