Spain’s borrowing costs hit near euro-era highs

Posted on July 20, 2012

Spain's Central Bank & Stock Exchange

Spain’s borrowing costs soared to within a whisker of a new euro-era high as mounting fears over its wilting economy and government finances overwhelmed the eurozone’s approval of loans to help Madrid recapitalise its banks.

The euro tumbled to its lowest level in more than two years against the dollar, losing 1 per cent to dip below $1.22 as investors fled for the safety of the US currency, and the Spanish stock market suffered its worst day in over two years.

    Investors have been spooked by a disappointing Spanish bond auction on Thursday, which was followed on Friday by the Valencia region’s request for emergency aid from the central government, and Madrid’s downbeat revised forecasts for its economy.

    Spain now expects to remain in recession until 2014, adding further headwinds to its fight to regain the confidence of financial markets.

    As a result, Spain’s 10-year bond yields rose to a high of 7.284 per cent on Friday, according to Bloomberg data, only slightly below the euro-era high of 7.285 per cent touched earlier in the crisis. Tradeweb, a rival data provider, said the 10-year yield touched a record of 7.309 per cent.

    “We’re approaching a crunch moment,” said Nick Gartside, chief investment officer for international fixed income at JPMorgan Asset Management. “Ten year yields above 7 per cent are quite corrosive.”

    The sell-off was particularly sharp in shorter dated Spanish government bonds. Spain’s two-year bond yield spiked to 5.76 per cent, the highest since late last November.

    “It’s a pretty bad day, it’s been quite a sell-off, especially in the front end,” said Peter Goves, a strategist at Citigroup. “The auction earlier this week wasn’t well received, and the problems in the Spanish regions remain a fundamental part of the outlook.”

    Spain has been selling mainly short dated bonds to reduce its interest rate payments. Rising short term borrowing costs exacerbated concerns that Madrid may be forced to seek a full sovereign bail-out from the eurozone’s rescue facilities – in addition to its already agreed €100bn bank rescue.

    Adding to eurozone tensions, the European Central Bank piled pressure on to Athens to agree reforms ahead of a visit by international lenders by saying it would not accept Greek government debt “for the time being” in exchange for central bank funds.

    The turmoil in Spain also infected Italy, the world’s third largest bond market. Rome’s 10-year bond yields climbed sharply above the 6 per cent mark, and Italy’s benchmark stock index shed 4.4 per cent, the most since April.

    In contrast, havens within Europe saw strong inflows, with Germany’s 10-year bond yield falling to as low as 1.15 per cent – near a fresh record low – and northern European currencies outside the eurozone making significant gains.

    The UK pound hit its highest level against the euro in nearly four years while the Swedish krona rose to its strongest level against the euro since the turn of the century. The euro also hit record lows against the Australian and New Zealand dollars.

    “It’s a bad hair day for the euro,” said Steven Englander, head of foreign exchange strategy at Citigroup in New York. “Foreign investors and Europeans are leaving the eurozone. There’s no indication we’re close to seeing anything resolved.”

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