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Spain Puts The Heat On Eurozone


(EurActiv) — Spain paid the second highest yield on short-term debt since the birth of the euro at an auction yesterday (24 July), prompting market watchers to warn that such levels aren’t sustainable and that the EU’s fourth largest economy will need a bailout the eurozone can barely afford.


The Spanish Treasury €3 billion of three- and six-month bills as yields on the six-month paper jumped to 3.691% from 3.237% in June.

“The most important takeaway from this auction is that Spain was able to get all its debt out the door,” said Nicholas Spiro of Spiro Sovereign Strategies. “Still, in March, Spain was able to issue six-month debt at a yield of under 1%. Now it is paying 3.7%.”

Spain had cushioned itself by securing well over half its annual debt needs in the first six months of the year when market conditions were more benign, but that advantage has evaporated as its funding needs for the rest of the year have grown.

Regions in difficulty

Spain's PM Rajoy and Cabinet
Spain’s PM Rajoy and Cabinet

On Friday, the government said it expected the economy to remain in recession well into next year, while the autonomous region of Valencia became the first to ask Madrid for aid to pay debt obligations it cannot meet. Others are expected to follow.

Spain’s northeastern region of Catalonia, responsible for a fifth of the country’s economic output, admitted it had financing needs to meet while its access to markets was shut, but had not decided yet whether to tap a state liquidity line.


On the secondary market, Spanish five-year government bond yields rose above 10-year yields for the first time since June 2001. Having to pay more to borrow shorter-term rather than longer-term is usually a sign that markets think the risk of a default or debt restructuring has increased.

“The spread between 5- and 10-years moved to negative today, which is a classic sign that the market thinks the current trends are unsustainable for Spain’s fiscal dynamics,” said Nick Stamenkovic, bond strategist at RIA Capital Markets.

The return investors demand to hold Spanish 10-year bonds is now at 7.6%, while the cost of insuring Spanish debt against default has also hit record highs.

Bank bailout not enough

Ten-year yields above 7% have proved to be a tipping point leading eventually to bailouts for other countries in the eurozone, though Spanish Economy Minister Luis de Guindos has insisted that Madrid would not need more aid.

The government has already asked for up to €100 billion to recapitalise the nation’s banks, which have been battered by a four year economic downturn and a property crash.

The government has launched a fresh €65 billion package of tax rises and spending cuts designed to chip away at its debt mountain but it will also probably drive the economy deeper into recession.

The alarming spiral of Spain’s debt costs has banished any hopes that a bailout of its banks, or a June EU summit that gave the eurozone’s rescue funds a green light to intervene in the markets, has put the debt crisis into abeyance.

Spain and Italy have called for help to ward off market pressure. The European Central Bank has cut interest rates but has shown marked reluctance to revive its bond-buying programme, the only mechanism that could lower borrowing costs at a stroke.

De Guindos and Wolfgang Schäuble, Spain and Germany’s Finance Ministers, called on Tuesday for a quick implementation of the decisions of the last European Union summit, particularly setting up a banking union with a single European supervisor.

They also said after meeting in Berlin that Spain’s funding costs did not reflect the fundamentals of its economy and the sustainability of its debt.

French Foreign Minister Laurent Fabius said further aid for Spain could take the form of an increase in Europe’s rescue fund or action by the ECB.

“I hope it will not be necessary to intervene again,” he told France 2 television. “If we have to intervene, it could be an increase in the firewalls … or interventions by the central bank.”

The eurozone as a whole is now slipping into recession.

Business surveys on Tuesday showed the currency area’s private sector shrank for a sixth month in July, with the downturn that began in the eurozone’s high debt nations now becoming entrenched in Germany and France.

EFSF downgraded

Underlining the pressure on the eurozone, Moody’s Investor Service lowered the outlook on the EU’s temporary bailout fund, the European Financial Stability Facility (EFSF), after threatening the top-notch credit rating of three of its main backers, including Germany, earlier in the week.

The downgrading on the EFSF’s provisional Aaa long-term rating to negative from stable took place following Moody’s decision earlier in the week to change the outlooks for Germany, the Netherlands and Luxembourg to negative.


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