A growing belief that Spain is going to need a full bailout from the European Union caused Madrid’s borrowing costs to rise again on Tuesday.
The interest it had to offer to get investors to buy its short-term government bonds rose close to the highest since the creation of the euro.
Spain did find buyers for all the three billion euros worth of bonds it wanted to sell, but the markets are very nervous, which was reflected in a sell-off shares on the Madrid stock exchange.
Adding to the worries was the near certainty that more of Spain’s regions will ask for bailout help from Madrid as they can no longer borrow independently.
David Jones, Chief Market Strategist with IG Index, said: “I think a full bailout for Spain is something that the European Central Bank and the eurozone as a whole will be very keen to try and avoid, but it’s difficult to see it going any other way at the moment.”
Spain’s Economy Minister Luis de Guindos was in Berlin on Tuesday for crisis talks with his German counterpart Wolfgang Schaeuble.
On Monday de Guindos repeated Madrid would not need more aid.
The government’s position remains that the 100 billion euros that it has asked for from the EU to recapitalise its battered banks will be enough to stem the crisis but the latest bond auction showed the markets do not believe that.
Madrid’s mounting costs
Spain’s increasingly desperate struggle to put its finances right have seen its borrowing costs soar to levels that are seen as being unsustainable. Italy, commonly regarded as too big to bail out, has been dragged along in its wake.
The Spanish Treasury raised 3.04 billion euros of three and six month T-bills, meeting its target. The average yield on the three month bill was 2.434 percent, up from 2.362 in June.
For the six-month paper, the yield jumped to 3.691 percent from 3.237 percent last month.
On the secondary market, Spanish five-year government bond yields rose above 10-year yields for the first time since June 2001. Having to pay more to borrow shorter-term rather than longer-term is usually a sign that markets think the risk of a default or debt restructuring has increased.
“The spread between five and 10-years moved to negative today, which is a classic sign that the market thinks the current trends are unsustainable for Spain’s fiscal dynamics,” said Nick Stamenkovic, bond strategist at RIA Capital Markets.