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Debt crisis: Spain and Italy under pressure

Debt crisis: Spain and Italy under pressure
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In the midst of the worsening euro zone debt crisis Spain has survived a crucial test of its ability to sell government bonds.

With the financial markets worried that the euro zone’s fourth biggest economy could be the next to need a bailout Madrid managed to find buyers for 3.3 billion euros worth of bonds on Thursday but had to pay a hefty – and unsustainable – rate of interest.

Worries about Spain going the same way as Greece, Portugal and Ireland pulled down shares in Madrid nearly four percent with those falls mirrored around Europe.

Debt expert Javier Ferrer with Ahorro Corporacion commented: “We have very big volatility, that’s for sure. Moreover I would say that the volatility will continue, because doubts and uncertainty will continue. The situation with the US economy doesn’t help. That is provoking more instability in general.”

That instability is threatening to engulf Italy, the euro zone’s third largest economy, which also has huge public debt and is having to pay unsustainably high rates of interest to borrow.

On Thursday Prime Minister Silvio Berlusconi repeated assurances that Italy’s economy is solid; trying to stave off market turmoil he promised a comprehensive reform pact with unions and employers by September aimed at getting the economy to grow.

He brushed off fears about the sharp rise in Italian borrowing costs and the widening spreads between the yields on 10-year Italian bonds and their benchmark German equivalents over recent weeks.

“I don’t think the crisis will get worse,” he told reporters. “We should not be afraid about the current level of spreads because they only affect a small part of the public debt at any moment, which overall remains at the interest rates it was placed at years ago.”