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Eurozone bond market tension rises

Interest rates for Spain and Italy rose sharply on Monday, but borrowing conditions for benchmark Germany and also for France eased, marking new tension before eurozone ministers met.

The Spanish 10-year rate surged again above the danger level of 7.0 percent to 7.026 percent from 6.912 percent late on Friday.

A rate above 7.0 percent is believed to put a eurozone country at risk of needing a debt rescue.

Analysts said they did not expect the Eurogroup meeting of eurozone finance ministers in Brussels on Monday to make significant progress on issues arising out of an EU summit 10 days ago.

That summit was presented by EU leaders as a breakthrough in structuring help for Spanish banks, by separating it from national debt, and by establishing the basis for a eurozone banking union.

“Investors doubt the capacity of the two countries (Spain and Italy) to clean up their public finances, given the worsening of the economic situation,” BNP Paribas bond strategist Patrick Jacq said.

“From now on the two lifelines represented by the European summit at the end of June and the meeting of the European Central Bank last week, are behind us. The market does not expect much progress at the Eurogroup meeting.”

The ministers were expected to delay most of the decisions on Greece, which wants longer to meet rescue terms, on Cyprus which wants help for its banks, and on Spanish banks, to a meeting on July 20.

The spread or the difference between the rate Spain must pay to borrow for 10 years and the German rate — the benchmark for the eurozone — widened to 5.66 percentage points.

The Italian 10-year rate also rose to 6.113 percent from 6.016 percent.

Rates of more than 6.0 percent are considered unsustainable over the long term.

The yield on 10-year German debt on the secondary market for existing bonds fell meanwhile to 1.312 percent from 1.326 percent.

But at an auction of new German bonds with a life of six months, investors in effect paid to lend Germany money, as they flocked to the safe haven of Europe’s top economy.

The yield or rate on the auction of six-month debt was a record low at minus 0.03 percent, the Bundesbank, which organised the auction, said in a statement.

Despite having to pay to park money with Germany, demand was still strong, with investors bidding for 5.5 billion euros’ ($6.7 billion) worth of bonds with only four billion euros’ worth on offer.

In line with usual practice, the Bundesbank retained about 710 million, meaning only 3.3 billion euros’ worth of bonds were actually sold.

France borrowed 9.373 billion euros with the sale of medium and long-term debt on Monday, and the rate paid on new 10-year debt was close to a record low point.

Demand for the 10-year bonds was two to three times the supply, and the 10-year yield was 2.53 percent, slightly up from a record low level of 2.46 percent at a similar issue on June 7.

Meanwhile, data from the Bank of Portugal showed that Portuguese banks, which are unable to borrow on commercial terms on the inter-bank market, borrowed 60.5 billion euros from the European Central Bank in June, setting a record.

This borrowing by Portuguese banks has accelerated since May 2011 when Portugal obtained a rescue of 78 billion euros from the European Union and International Monetary Fund. The bailout included 12 billion euros for recapitalisation of the financial sector.

In June 2011 the Portuguese banks had borrowed 43.8 billion euros. In March this year, they borrowed 50 billion euros, and in May a record 58.7 billion euros.