Spain sees borrowing costs soar in gathering euro storm

Spain saw its borrowing costs soar yesterday as it tapped markets for the first time since Greek elections, feeding fears it could be the next victim of the eurozone crisis.

Deepening concerns over Spains’s fast-rising debt and its banks, which have thrown a eurozone lifeline of up to €100 billion have driven Spain to the centre of the storm.

Even as Greece’s pro-bailout parties negotiated the terms of a coalition government, averting the immediate risk of a disorderly exit from the eurozone, Spain’s troubles mounted.

Spain’s Treasury succeeded in raising €3.04 billion, beating its €2 to €3 billion target in an auction of 12- and 18-month notes.

But it had to pay exorbitant rates to lure investors: 5.074 per cent for a 12-month debt and 5.107 per cent for an 18-month debt.

“We are entering a situation of near panic,” said Fernando Ballabriga, head of economics at ESADE business school.

“Financing could be cut off drastically from one day to the next. It is very difficult to predict,” he said.

“Now it is focused on Spain. In no time it could be Italy.”

Spain is paying rates that are unsustainable and put it on track for a full-blown bailout, said a report by Kathleen Brooks, research director in London at online brokerage Forex.com.

The eurozone’s fourth largest economy could avoid a state rescue only if its debts were underwritten by stronger eurozone partners and the European Central Bank stepped in to buy up its debt, she said.

“It’s unlikely that fiscal union and pooling of debt is likely to happen any time soon, and definitely not before the EU summit at the end of the month,” Ms Brooks said.

“But at the rate its yields are rising, Spain doesn’t have enough time to wait for Europe’s politicians to decide whether or not to underwrite the debts of the weakest states, it needs action now.”

The yield on Spanish benchmark 10-year government bonds shattered the seven per cent barrier on Monday for the first time since the creation of the euro in 1999, pushing over 7.2 per cent.

Yesterday, the yield on 10-bonds dipped to 7.003 per cent, a rate regarded as unaffordable.

The extra rate charged on Spanish 10-year bonds when compared to safe-bet German bonds, known as the risk premium, hovered at 5.63 percentage points, near euro-era records.

Adding to the sense of uncertainty, a financial source said a second audit of the banks, which is to follow a first exam due by tomorrow, had been delayed from end-July to September to allow time to gather more information.

“The eurozone crisis is entering a dangerous and existential phase with the rise in Spanish bond yields pointing to the need for a bailout while in Greece the political situation looks fragile and not strong enough to diminish the scenario of a Greek exit,” said Neil MacKinnon, an analyst at VTB Capital financial group.