Spanish borrowing costs soar
Spain’s borrowing costs shot up today in an auction of short-term debt, in another sign that investors are growing more wary of holding the country’s bonds amid fears that the eurozone’s debt crisis is spreading.
That contagion is evident in the hike in Spain’s borrowing rates in the secondary markets. The yield on its benchmark 10-year bonds soared to 6.25% today, not far short of the 7% rate considered unsustainable in the long-run.
Spain faces a big test of investor appetite this Thursday when it auctions between €3bn-€4bn.
The ratcheting up of the pressure on Spain’s public finances is forming the backdrop to this Sunday’s general election, at which the opposition conservative Popular Party is widely predicted to score a landslide win.
The conservatives have given little detail of what they plan to do to reboot the economy. The party did, however, announce today it would present to parliament by mid-January its proposal for a €3,000 tax deduction for small and medium-sized businesses and self-employed people who take on staff.
Small and medium-sized businesses provide some 80% of Spain’s jobs. Unemployment in the country now stands at a eurozone high of 21.5%.
The party also promised it would reform Spain’s labour law to make it cheaper to hire workers without making it cheaper to fire them.
Spain has seen its credit rating downgraded several times over the past year or so but has so far managed to avoid facing a full-blown debt crisis, like the ones that forced Greece, Ireland and Portugal into getting multibillion bailouts after they were effectively locked out of international bond markets.
Though Spain’s annual borrowing levels are high, its overall debt burden remains relatively low and that has given the eurozone fourth largest economy a cushion, in contrast to Italy, which has become the epicentre of the debt crisis over the past week.
Agencies have cited Spain’s weak economic prospects – growth was flat in the third quarter – and investors are getting sceptical about the deficit-reduction program.
The Socialist government’s goal is for the budget deficit to fall to 6% of GDP at the end of the year, but hardly anyone thinks that is realistic with tax revenue so meagre and outlays so hefty because of the sluggish economy.
Spain is struggling to recover from the bursting of a real estate bubble that had largely fuelled nearly a decade of solid growth.
The government blamed Tuesday’s bad numbers on financial jitters around Europe and ruled out a rescue for the eurozone’s fourth largest economy.
“Spain is not going to need a bailout,” Secretary of State for European Union affairs Diego Lopez Garrido told reporters in Brussels.
“Spain has a solid and solvent economy. Spain has done its homework. Spain, and the EU has recognised this, has done what it had to do.
"…Whatever difficulties there may be – yield increases, higher debt interest rates at auctions – are due to a temporary situation of financial instability.”
