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Winnipeg Free Press - PRINT EDITION

Europe nervous as yields soar

Spanish, Italian bonds worrisome

By: Ciaran Giles

Posted: 07/7/2012 1:00 AM | Comments: 0

MADRID, Spain -- Borrowing rates for Spain and Italy rose to distressing levels again on Friday, signalling a resurgence in concern over Europe's debt crisis just one week after markets cheered leaders' decision to help financially weaker states.

The rate, or yield, for the Spanish 10-year bond was up 0.22 percentage points to 6.96 per cent by early afternoon in Madrid. That level is deemed unsustainable over the long term and could push Spain to seek a full-blown bailout such as Greece, Ireland and Portugal.

Italy's equivalent rate was up 0.13 percentage points to 6.01 per cent. In comparison, Germany's bond -- seen as a safe haven for investors -- was commanding a yield of just 1.37 per cent.

Both Spain's and Italy's yields fell sharply earlier this week in a wave of euphoria after European leaders agreed to channel aid directly to troubled banks, without further burdening a country's debt. They also agreed to make it easier for countries to get rescue loans and for the European bailout fund to buy bonds from other investors, which would lower countries' borrowing rates.

The summit decisions were generally seen as a step in the right direction in the resolution of the crisis, but the feeling is that more needs to be done -- and faster.

"The optimism following last week's EU leaders' summit is fading as concerns over various aspects of the agreement creep in," wrote Elisabeth Afseth and Brian Barry, fixed income analysts at Investec financial services, in a note to clients.

One key concern is the European bailout fund will not be big enough if Spain or Italy needed rescue loans for their governments.

The bailout fund will have 500 million euros in lending power when the permanent version is finalized this month. It has already committed 180 billion euros to help Greece, Ireland and Portugal. Spain will ask for as much as 100 billion euros to rescue its banks, and Cyprus is expected to seek a bailout of up to 10 billion euros.

But European leaders have given no sign they intend to increase the bailout fund's lending capacity. In fact, smaller eurozone countries such as Finland have been complaining about the cost of the rescue operations.

The bond rates for Spain and Italy began inching up on Thursday, when the European Central Bank gave no indication it would take more emergency action to ease eurozone government borrowing rates. The ECB has in the past bought the governments bonds of financially weak countries like Spain and Italy and also flooded banks with cheap loans. Those measures helped bring borrowing rates down, but only for a few months at a time.

Investors are also aware the eurozone economy is in terrible shape, which will make it more difficult for Spain and Italy to cut their public debt. Almost half the eurozone countries, including Spain and Italy, are in recession.

-- The Associated Press

Republished from the Winnipeg Free Press print edition July 7, 2012 B17

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