Spain's Borrowing Costs Soar on ECB Warning

(AP) Spain’s borrowing costs soar on ECB warning
CIARAN GILES
Associated Press
MADRID
Spain’s borrowing costs stayed high Friday as investors showed their disappointment with the European Central Bank’s warning that it would only help the country if it applied for rescue aid.

The interest rate, or yield, on Spain’s benchmark 10-year bond rose 0.14 percentage points to 7.21 percent in the first hour of trading although it later edged back to 6.97 percent. Such rates are unsustainable over the long term and could likely push Spain to seek a bailout.

The yield had dropped to 6.5 percent last week after ECB chief Mario Draghi first intimated he would apply measures that would help ease the pressure on borrowing costs. By comparison, the rate demanded by investors for Germany’s more trusted 10-year bond was 1.33 percent.

Spain’s benchmark Ibex 35 stock index opened negatively but rallied upward by more than 3 percent by noon. It had shed more than 5 percent Thursday after the ECB’s announcement.

Prime Minister Mariano Rajoy is to hold a press conference Friday afternoon following a weekly Cabinet meeting. In a conference Thursday with Italian Premier Mario Monti, he avoided answering questions as to whether Spain would actually ask for financial help. The conservative government has repeatedly denied it will need a bailout.

Greece, Ireland, Portugal and Cyprus have already sought bailouts but a Spanish sovereign rescue package would seriously test the European Union’s coffers as it is the fourth largest economy of the 17 nations using the single euro currency.

But some analysts think it’s only a matter of time.

Spain’s borrowing costs have risen sharply for all bond types in recent months as the uncertainty continues unabated.

In its favor, the country has already managed to place 72 percent of its targeted (EURO)86 billion ($106 billion) in medium- and long-term debt for this year. It has minor T-bill auctions Aug. 21 and Aug. 24 while its next bond sale is not until Sept. 6.

The Treasury, however, must pay (EURO)53 billion ($65 billion) in bond redemptions before the end of the year, including a stiff (EURO)27 billion ($33 billion) in October.

Spain is in its second recession in three years with an unemployment rate of nearly 25 percent. It has already been granted a loan of up to (EURO)100 billion ($123 billion) to help a handful of its banks laden down with toxic assets following the bursting of a real estate bubble in 2008.

But many of its 17 regional governments are now starting to run out of money while austerity measures and labor reforms brought in to try to calm financial markets and appease EU partners are stifling the economy.

Strikes and protests have become almost a daily feature. On Friday, some 500 trains were canceled as rail workers staged a one-day strike to protest a proposed restructuring of the sector. The stoppage came at the beginning of one of Spain’s biggest holiday months.