Bond markets attack Spain as contagion fears spread

Deeply indebted Spain was forced to pay through the nose for much-needed funds today amid growing doubts over its banks. Madrid raised €2.5 billion (£2 billion) from jittery bond markets but its borrowing costs soared, heaping more pressure on the nation’s buckling finances. Spain paid 5.1% to borrow for five years — a 50% jump from March, the last time it sold similar debt. Spain’s benchmark borrowing costs have soared dangerously above 6% since Greece’s future in the euro was cast into doubt by inconclusive elections, raising the prospect of a catastrophic default by Athens. Stock markets across Europe shuddered as London’s FTSE 100 index also hit a six-month low, losing 44.29 to 5361.96. Nicholas Spiro, managing director of Spiro Sovereign Strategy, said: “These are painful auctions for the Treasury.  Spain is selling its debt at punitive rates against a rapidly deteriorating domestic and external backdrop. Eurozone ‘break-up contagion’ is seeping into Spanish yields. “The Spanish government itself can do very little to shore up confidence in the near term.” Investors also turned on Spain’s fourth biggest bank, Bankia, which was nationalised last week after fears over its huge losses on loans to property developers. Its shares slumped more than 10% amid reports that savers had pulled more than €1 billion from their accounts in the past week. Spain, whose double-dip recession was formally confirmed today, has demanded that banks put aside an extra €30 billion in provisions for property losses. But experts said this left Spain’s banks — big buyers of government debt — with less funds available, forcing Madrid to pay more to borrow. In contrast the safe-haven UK paid just 0.35% today to raise £1.5 billion for two years. Rabobank rate strategist Richard McGuire said: “With foreign investors evidently rushing for the exits and domestics’ ability to bridge the gap limited by the government’s imposition of ever more stringent loss provisioning ... ultimately this ratcheting up of yields will likely require some form of outside intervention.” Italy’s banks were also in the spotlight today as its banking association warned of weakening demand among retail investors for bank debt. The banks need the funds to roll over €137 billion in debt this year but ratings agency Moody’s slashed its ratings on 26 Italian financial firms this week, pushing up their funding costs.

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