Spain’s tough austerity budget has failed to reassure the financial markets, and at its latest auction of government bonds Madrid had to offer higher interest rates to find buyers for those bonds.
That was in contrast to a successful step back into debt markets by neighbouring Portugal.
The worry is Spain is getting closer to the point where it can no longer afford to maintain its debt and will need a bailout.
The yield – that is the interest rate payable – on the country’s bonds redeemable in 10 years spiked close to 5.7 percent. Just over one month ago, that rate was down below 4.9 percent.
Trying to reassure investors, Spain’s economy minister, Luis De Guindos, said the deficit targets for this year and next year are set in stone and promised further reforms in the coming weeks.
But economist Pablo De Barrio with XTB Analysts pointed out that with borrowing costs rising, what is missing is additional support from the European Central Bank to reassure bond investors.
He added: “Although the new austerity budget will reduce government spending and boost the amount of money coming in, there could be less income for the government than expected if the economy contracts.”
Despite the concerns, many analysts believe Spain can avoid a bailout.
Its neighbour Portugal, which did need a European Union and International Monetary Fund bailout, had good news on Wednesday when it managed to sell one billion euros of 18-month treasury bills at a lower rate of interest than it had to pay one year ago.
The average yield on the new T-bill was 4.537 percent, compared with 5.993 percent on the last 18-month bill auctioned in March 2011, before Portugal was forced to withdraw from the bond market.
Lisbon also sold 500 million euros in 6-month T-bills at an average yield of 2.90 percent, sharply down from February’s 4.332 percent.
Still, most investors doubt that Portugal, which is in a deep recession, can finance itself fully in the commercial debt market from the second half of 2013 as the bailout deal envisages. They say it may need additional rescue funds, and some have even expressed fear of a Greece-style debt restructuring.
The Lisbon government insists the country is on track to meeting its bailout goals, including the return to the markets.