Tuesday, 24 July 2012

Spanish borrowing costs hit new historic high

MADRID - Spanish borrowing prices hit a new historic high on Tuesday after a second region said it too may seek rescue aid, roiling world markets already hit by a surprise ratings warning to Germany.
The Spanish stock market plunged for a third day, falling by 3.58 per cent to its lowest close since April 2003. Other markets limited their losses, but fears that Madrid will soon need a full-blown bailout loomed large.
Spanish and German finance ministers sought to contain such fears, saying that Spain's soaring borrowing costs do not correspond to its economic strength or the "sustainability of its public debt." The joint statement by Wolfgang Schaeuble and Luis de Guindos after talks in Berlin followed another statement from Madrid reportedly on behalf of Spain, France and Italy expressing impatience at a delay to major financial reforms.
"Speed is an essential condition for the success of any European action," the statement quoted Spain's junior minister for European Affairs, Inigo Mendez de Vigo, as saying.
But Italy expressed "stupor" at the "supposed" statement and France also categorically denied it was behind a call that, if confirmed, would have likely been interpreted as a thinly disguised challenge to Germany.
"There has been no common approach with Italy and Spain," French European Affairs Minister Bernard Cazeneuve said. "I have not asked for the immediate application of the accords. It makes no sense to say that." Following the angry comments by Rome and Paris, Mendez de Vigo backtracked, saying he didn't intend to say that the three countries had issued a joint statement.
Amid the turmoil, the euro fell 0.4 per cent against the dollar in New York trade on Tuesday, touching fresh two-year lows as Spain appeared to inch closer to a bailout.
The European currency fell as low as US$1.2059, its lowest level since June 2010, before recovering slightly.
More bad news was delivered by Moody's ratings agency, which lowered the outlook on the EU's bailout fund from stable to negative Tuesday, a day after threatening the triple-A credit ratings of three of the eurozone's major guarantors.
Moody's said its decision to lower the outlook on the European Financial Stability Facility (EFSF) reflected the changes in outlooks on Germany, the Netherlands and Luxembourg. But it maintained the EFSF's triple-A rating.
The EFSF, which was established with a total lending capacity of 440 billion euros, is to be replaced eventually by a permanent rescue fund called the European Stability Mechanism, with 500 billion euros of firepower.
In Berlin, Schaeuble and de Guindos only stressed "the importance to work - together with European Partners - on the quick implementation of the European Council decisions of June 29." Those words were echoed by French Finance Minister Pierre Moscovici, who called for the "rapid" and "effective" execution of decisions made at the June summit to assure the sustainability of the eurozone. He meets de Guindos Wednesday.
Earlier Tuesday, the finance minister of Catalonia, Spain's second biggest region, raised the prospect of a regional bailout in a morning interview with BBC radio.
Another big region, Valencia, last week became the first to apply for help from an 18-billion-euro (US$22 billion) fund set up by the central government to rescue struggling regions.
Economists increasingly agree that a eurozone bailout of up to 100 billion euros agreed for Spain's banks will be insufficient to get the country through the crisis brought on by a collapse of its real estate boom in 2008.
The yield or rate of return on the benchmark 10-year Spanish government bond crept ever higher Tuesday, at 7.621 per cent, hovering at the levels that forced Greece, Ireland and Portugal to seek EU-IMF bailouts.
It marked the highest level that Spain's yield has reached since Madrid adopted the euro.
At such high rates, it is impossible to raise funds on the market, said Daniel Pingarron at IG Markets, forecasting that Spain could only hold out for two months.
Analysts said Spain needs either a bailout or market intervention by the European Central Bank to force its borrowing costs down by buying bonds.
The ECB has done this before but it is not clear if it is ready to step in again now without clear backing from the major eurozone states, especially Germany.
The shock decision by ratings agency Moody's to slash the outlook of Germany, Europe's top economy and paymaster, from "stable" to "negative" came as auditors arrived in debt-wracked Greece.
Moody's said its decision was based on "rising uncertainty regarding the outcome of the euro area debt crisis (and the) ... increased likelihood of Greece's exit from the euro area." In Athens, auditors from the International Monetary Fund, ECB and European Union arrived to review Greek progress towards securing a further slice of bailout cash before the country goes bankrupt.
Officials in Germany have insisted they will wait for this report, due in early September, before casting judgement on Greece's ability to stay in the eurozone.
European Commission President Jose Manuel Barroso visits Athens for talks with Prime Minister Antonis Samaras on Thursday, his first since June 2009. - AFP

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