Business World

Wednesday 20 September 2017

Spain's borrowing costs soar as economy shrinks

Firefighters march during a protest by firefighters and police officers against government austerity measures in Valencia yesterday. Placard reads, ‘We are the people, we are not afraid of you’.
Firefighters march during a protest by firefighters and police officers against government austerity measures in Valencia yesterday. Placard reads, ‘We are the people, we are not afraid of you’.

Ciaran Giles

10-year bond yields are highest since 1999 amid worries about financial problems in regions

THE financial pressure on recession-hit Spain ratcheted up further yesterday.

The yield on Spain's benchmark 10-year bond spiked 0.23 percentage points to 7.46pc, further evidence that investors are sceptical about the Spanish government's ability to get a handle on its debts at a time of recession and sky-high unemployment. Worries over the financial health of the Spanish regions have contributed to the latest spike too.

Those concerns have swelled after the Bank of Spain said the Spanish economy contracted by a quarterly rate of 0.4pc in the second quarter -- falling economic output makes it even more difficult for Spain to deal with its debts.

If Spain's borrowing rates continue to rise -- it's not just the 10-year bond that's seeing higher yields -- then Spain may end up being locked out of international markets and be forced to seek a financial rescue, just like Greece, Ireland and Portugal.

Spain's 10-year yield is at its highest level since the euro was established in 1999 and above the 7pc level that prompted the others to request a bailout.

Spanish stocks also took a hit as the country's borrowing rates pushed higher. The Ibex 35 stock index in Madrid was down 4pc in early afternoon trading.

The latest bout of jitters comes barely a month after the leaders of the 17-country eurozone agreed a package of measures designed to instill confidence in the markets. Eurozone partners have also agreed to lend Spain up to €100bn in funds to bail out banks laden down with toxic assets following the collapse of the country's real estate bubble over the past four years.

For its part, the Spanish government has pushed through another round of austerity and structural reforms in a bid to convince investors. However, opposition to the government's strategy is increasing, especially as the country is mired in its second recession in three years and weighed down by an unemployment rate of nearly 25pc.

Another of Spain's chronic problems is now beginning to rear its ugly head -- debt-wracked regions.

The 10-year bond spread jumped above 7pc last Friday after the eastern Valencia region revealed it would need a bailout from the central Madrid government. Over the weekend, the southern region of Murcia said it may also need help. Speculation is now strong that several other cash-strapped regional governments may follow.

A fund for Spain's 17 regions was created on July 13 and will have €18bn in capital.

Many Spanish regions are so heavily in debt due to the recession and the burst real estate bubble that they cannot raise money on their own.

Investor concern about regional debt grew when the central government was forced to revise Spain's 2011 budget deficit upwards for a second time to 8.9pc in May -- an embarrassing adjustment that had to be made after four of the regions confirmed they had spent more than previously forecast.

Irish Independent

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