Spain's debt tops 7pc danger level as Madrid gets more time
BORROWING rates for the Spanish government rose above the 7pc danger level again yesterday, but investors paid the French government to lend it money, as the differences between eurozone countries continued to widen.
The rise in the yield demanded by holders of Spanish debt climbed amid fears that this week's meeting of finance ministers would make little progress, and signs of a new austerity package for the shrinking Spanish economy.
Analysts say Spanish Prime Minister Mariano Rajoy may unveil a third austerity round within days, as his six-month- old government tries to avoid a second bailout and tax receipts fall.
EU finance ministers have agreed that Spain should have an extra year to gets its deficit down to the permitted level of 3pc of GDP, but that will still require extra taxes and spending cuts.
The new targets may still prove difficult to reach, according to the draft recommendation from the European countries to Spain, loosening its goals and demanding the country be subjected to three-monthly checks.
Tax receipts dropped 1.5pc during the first five months of the year as higher levies on income, electricity and tobacco failed to compensate for a 10pc slump in VAT revenue.
Spending rose 12pc as the state bailed out regional governments, and interest payments surged 32pc. Italy was also under pressure as European stock markets opened weaker following losses in Asian trade earlier.
But Ireland continued to move with the "creditor" nations. Yields on Irish debt payable in 2020 fell 2.6pc yesterday, while similar Spanish yields jumped 11pc.
Yields on Irish bonds fell for a fifth week last week, the longest such run in five months.
Last week's fall -- and the accompanying rise in bond prices -- made Irish 10-year bonds the world's best performer in the week.
But the Irish gains could soon run out of steam, one analyst said yesterday. "We are toward the end of the rally," said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland.
"While getting the bank costs taken over by the rescue mechanism would be a very positive factor, Irish bonds already reflect a great deal of good news.
"There has to be a more convincing reason to buy them, given all the uncertainties surrounding the banking discussions."
Meanwhile, the French government was able to borrow at "negative" interest rates, raising almost €6bn in short-term debt at -0.05pc and -0.06pc.
France joins Denmark, Germany and the Netherlands as EU countries that have attracted lenders willing to pay to hold their debt, as safety takes precedence over earnings.
ECB president Mario Draghi told the European Parliament that his staff were searching for actions that could alleviate the crisis, as long as they don't breach the central bank's inflation-fighting mandate.
He did not rule out another interest rate cut, but claimed the crisis had eased.
"I have said many times that if you compare today's world with six months ago, when we were at the closest to a major credit accident, the world is a completely different one," he told MEPs.
"The euro is here to stay and the euro area will take the necessary steps to ensure that," he said. (Additional reporting by Bloomberg)