Bailout threat hovers over Spain
Spanish Economy Minister Luis de Guindos arrives at the Moncloa Palace in Madrid on Dec. 23, 2011.
Published Wednesday, July 25, 2012 9:25AM EDT
MADRID -- Spain remained under intense financial pressure Wednesday as investors demanded high rates to lend the government money, while the country's politicians battled to avert a full-blown bailout for the economy.
The yield, or interest rate, on Spain's benchmark ten-year bond spiked 0.11 percentage point to 7.65 per cent in the first hour of trading, although it later eased back to 7.45 per cent by early afternoon.
A rate above 7 per cent is deemed untenable over the long term -- Spain has been suffering it for several weeks. Should Madrid find it too expensive to raise money from bond markets at such rates, it would have to ask for an international bailout like those sought by Greece, Ireland or Portugal.
The country's benchmark Ibex 35 stock index was up by nearly 2 percent, recovering only a fraction of the previous three days' heavy losses.
Spain denies it will need financial rescue for its public finances, but many investors now think it's only a matter of time.
The economy is in its second recession in three years, chiefly because of a 2008 collapse of the property bubble that had fueled the economy for more than a decade. It is not expected to grow again before 2014 and unemployment is around 25 per cent.
Adding to its concerns, the government also has to rescue its banks, many of which are sitting on soured real estate investments, and some of its 17 regional governments.
A eurozone deal to lend Spain up to (EURO)100 billion ($121 billion) to save the banks did little to ease concern over the country's debt levels, since the government will be liable to repay those loans if the banks cannot.
Meanwhile, two regions -- Valencia and Murcia -- have since Friday said they will tap an (EURO)18 billion emergency credit line the central government recently set up for cash-strapped regions. More are expected to follow.
The powerful northeastern region of Catalonia said Tuesday it was also considering requesting help from Madrid, but stressed that the credit line did not constitute a rescue or bailout for the region.
Catalonia, with a debt of (EURO)42 billion, is Spain's most indebted region but also one of the top two contributors to the nation's GDP.
Many Spanish regions are so heavily in debt due to the recession and the burst real estate bubble that they cannot raise money on their own on financial markets.
Investor concern about regional debt grew sharply when the central government was forced to revise Spain's 2011 budget deficit upward for a second time to 8.9 per cent in May -- an embarrassing adjustment that had to be made after four of the regions confirmed they had spent more than previously forecast.
The central government is, meanwhile, desperately looking for support from EU partners. Economy Minister Luis de Guindos traveled Wednesday to Paris for talks with his French counterpart, Pierre Moscovici after meeting Tuesday with Germany's Wolfgang Schaeuble.
Spain has been pleading for the European Central Bank to intervene and buy its debt to ease get its bond yields down. But so far its demands have fallen on deaf ears.