CONTAGION fears returned yesterday as both Italy and Spain were dragged into the debt crisis that has engulfed Greece.
The failure to manage the crisis in Greece is now shaking investor confidence in markets in countries that had been left relatively unscathed by the financial crisis.
Bond yields for Spain rose sharply yesterday to the highest level in more than a decade, and the country struggled to sell its government bonds for the first time this year. Following the Irish bailout, Spain was ranked as on of the weakest of eurozone bond issuers but this year the country successfully "de-coupled" from the distressed periphery.
Italy's bonds were also weaker as the "peripheral crisis" moved closer to the European core.
Investors remain nervous of buying European government debt as long as Greece fails to agree measures that will allow it to accept bailout loans, and the lenders cannot agree terms to lend it on.
Yesterday, Spain sold €2.84bn of bonds, but it was below the target the county wanted to raise.
Spain's government said it sold €1.51bn of 15-year bonds at an average yield of 6.027pc, up from the 5.953pc it paid in December. The country sold €1.33bn of eight-year debt at a yield of 5.352pc.
The difference between what Spain pays to borrow over 10 years and what Germany pays reached 2.7pc yesterday, reaching levels last seen in November during the Irish debt crisis.
Unsurprisingly, Greek government bonds plunged ever further yesterday. The yield, or cost of borrowing over two years, reached 30pc -- a new record.
It came as the country's prime minister George Papandreou failed to lockdown support in parliament for austerity plans that are a condition of its new bailout deal.
Portuguese and Irish two-year yields also hit the highest levels since the launch of the euro in 1999. Ireland's two-year yield increased 86 basis points to 12.96pc. The Portuguese two-year yield surged 58 basis points to 13.02pc.