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Spain and Italy on brink of bailouts

SPAIN and Italy last night seemed to be moving closer to the danger zone where a bailout by the European Union and the International Monetary Fund becomes unavoidable.

The interest rate on 10-year sovereign bonds of both nations, after dropping yesterday morning, spiked up in the afternoon.

Last night it cost Spain 6.6pc to borrow for 10 years. Italy's equivalent costs were 6pc. The price of insuring debt also rose, in a sign of increasing anxiety, with the Credit Default Swap rate on five-year Spanish debt hitting a record high.

Mario Draghi, the President of the European Central Bank, launched a withering attack on the Spanish government for failing to get to grips with the problems in its banking sector.

"There is a first assessment, then a second, a third, a fourth," Mr Draghi said.

"This is the worst possible way of doing things. Everyone ends up doing the right thing, but at the highest cost."

Last week the Spanish government announced plans to inject a further ¤19bn into Bankia, the country's fourth largest lender, which has been crippled by bad loans to a collapsed property sector.

An independent audit of Spain's banks, which are estimated by some analysts to be stuffed with more than €100bn of bad loans, is under way.

The fear of investors is that the Spanish government will be unable to afford to rescue its banks, forcing the country to apply for a bailout.

The austerity measures being pushed through by Spain and Italy, under strong pressure from other states, seems to be deepening their recessions.

Spain is forecast by the OECD think tank to contact by 1.6pc this year. Italy's economy is seen contracting by 1.7pc in 2012. Unemployment levels in Spain have hit 25pc. In Italy the rate is 9.8pc.