Spain is likely to pay record high rates to borrow at debt auctions this week after the Greek election failed to ease concerns about the future of the euro zone and amid uncertainty over whether Madrid will need a full sovereign bailout.
The yield on Spanish 10-year bonds hit a fresh high of above 7 percent on Monday, jumping by as much as 37 basis points, as initial relief over the victory of pro-bailout parties in Greece gave way to ongoing fears of deeper problems facing the bloc.
Seven percent is considered too pricey for a country to afford over the long term. Such levels have previously led to bailouts in Greece, Ireland and Portugal.
Spain’s Treasury will issue between 2 billion and 3 billion euros ($2.52 billion-$3.79 billion) of 12- and 18-month debt on Tuesday and between 1 billion and 2 billion euros of bonds due in 2014, 2015 and 2017 on Thursday.
Monday’s market response to the Greek election – in which parties committed to the conditions of a European Union/International Monetary Fund bailout won by a narrow margin – suggest the prognosis is not good.
“It looks as though the market’s broken now. I don’t think there’s anything the Spanish can do to bring it back. I don’t think the ECB can bring it back… (a full sovereign bailout for Spain) is inevitable,” said Harvinder Sian, a rate strategist at London-based RBS.
“With the (G20) summit not looking like it will produce anything particularly dramatic to help in the crisis situation, I think the market’s made its statement. There has to be a change in the way the Europeans are attacking the crisis.”
World leaders meeting in Mexico for a G20 summit on Monday are expected to push European leaders to outline a lasting strategy to save the euro currency and end financial turmoil.
Spain, the euro zone’s fourth largest economy and more than twice the size of bailed-out euro zone partners Greece, Portugal and Ireland combined, is at the centre of market jitters as it struggles with a deep recession and banking sector restructure.
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